Monday, March 16, 2009

Undue diligence: banks, corrupt regimes and the poor

The trailblazing non-governmental group Global Witness has just released a major new report on international banking called Undue Diligence, How banks do business with corrupt regimes. The fine report is the result of much painstaking work - a Global Witness specialty - and it starts with a rather obvious, but often forgotten observation:

"The world has learnt during 2008 and 2009 that failures by banks and the governments that regulate them have been responsible for pitching the global economy into its worst crisis in decades. People in the world’s richest countries are rightly angry at the increasing job losses and house repossessions.

What is less understood is that for much longer, failures by banks and the governments that regulate them have caused untold damage to the economies of some of the poorest countries in the world."

It is not often that we get to see directly into the dirty underbelly of the offshore system, and here is a peek, in all its gory details. The picture above is of Teodorin Nguema Obiang, the playboy son of the brutal Obiang Nguema Mbasogo of Equatorial Guinea (today's TJN blogger was, as it happens, standing next to the photographer, Javier Espinosa of El Mundo newspaper, when this photo of Teodorin was taken.) Global Witness provide an account number (30588 61204 61483680101) if you're interested) for his account at a branch of Barclays Bank in Paris, then a picture of some of his car purchases in France (see the next picture.)

The report contains many details such as these. They look at Riggs Bank and Barclays in the context of Equatorial Guinea; the Bank of East Asia and the Republic of Congo; Citibank, Fortis and Liberia; Deutsche Bank and Turkmenistan; Oil-backed loans to Angola; and look at some problems with the Financial Action Task Force (which we've criticised endlessly.) In the process of its investigations, Global Witness builds up an astonishing picture of a system that has run out of control. It also, for example, quotes the Nobel prize-winning economist Joseph Stiglitz, testifying to the U.S. House Financial Services Committee, who gets to a nub of the problem:

"[We] discovered that bank secrecy was not only for money laundering, tax evasion, drugs and corruption,but also for terrorism; we have since circumscribed the use of bank secrecy for terrorism – and thus we have shown that it can be done. But we have chosen not to deal with the problems of corruption and tax evasion which are so enervating to the developing countries and deprive them of so much needed money.

In 1999 the US Senate Permanent Subcommittee on Investigations produced a landmark report exposing how President Omar Bongo of Gabon had used an array of accounts with Citibank, through which many many millions of dollars passed, without anyone asking difficult questions. These accounts were of course closed, and Global Witness, with the help of three French organisations (Sherpa, Survie and Fédération des Congolais de la Diaspora) which had filed a complaint - looked into where Bongo's money is now. BNP Paribas and Crédit Lyonnais, was one answer. As the report says:

"The French police dossier does not reveal the source of funds into Bongo’s private accounts at BNP Paribas and Crédit Lyonnais. Global Witness and Sherpa asked these banks what due diligence they had done on their client Omar Bongo and his sources of wealth, particularly given the concerns raised over Bongo’s accounts by the US inquiry eight years ago. BNP Paribas said it could not respond; Crédit Lyonnais did not reply.

Global Witness asked the French regulator, the Secrétariat Général de la Commission Bancaire, if it was aware of any of these accounts at French banks, if it had ever monitored them, or if any suspicious activity reports had ever been filed that related to them. It replied that it could not answer questions about individual matters. Given that one of the banks, Barclays, is a UK bank, Global Witness asked the Financial Services Authority, the UK regulator, if it was responsible for regulating overseas branches of UK banks. It said it was not, this is the responsibility of the local regulator."

And it continues, in this vein, reporting the banks' evasive responses when asked what documents they had sought in receiving the funds.

"What kind of due diligence are these banks doing on their obviously high-risk clients?"



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