OCTOBER 2015 ATM ---------------------------------- “Corruption is one of the greatest enemies of progress in our time… It creates a system of patronage where the resources are shared out by a small elite while the majority are trapped in poverty, denied the benefits and proceeds of growth that are rightfully theirs.” UK PRIME MINISTER DAVID CAMERON, JULY 20151 ---------------------------------- ------------------- CONTENTS ------------------- SUMMARY......................................................................................................... 4 THE COST OF CORRUPTION ....................................................................... 8 IN THE DEVELOPING AND DEVELOPED WORLD THE BANKS: A HISTORY OF ......................................................................... 11 HANDLING STOLEN ASSETS WHAT BANKS ARE ......................................................................................... 14 SUPPOSED TO DO THE WRONG INCENTIVES: .......................................................................... 16 WHY BANKS ENABLE CORRUPTION THE OTHER FACTORS ................................................................................... 22 RECOMMENDATIONS .................................................................................... 24 ENDNOTES ..................................................................................................... 26 ....... 3 ------------------- SUMMARY ------------------- Corruption is a major problem The bad news is that while many which has a devastating human banks uphold these rules, cost. In poor countries it kills a large number do not. This failure people and traps millions more spans a spectrum of activities: in poverty. When unscrupulous from lacking systems to spot officials steal vast sums of state suspect funds, to turning a blind money, they decimate funds that eye when risky funds are identified, should be spent on hospitals, to knowingly handling ill-gotten schools and other basic services. gains. The result is that many banks leave the door wide open Rich countries are affected too. for corrupt people to launder their Corruption thwarts competition funds. Global Witness was one and innovation, and adds of the first organisations to bring to the cost of doing business to public attention the role that around the world, undermining the banks play in large-scale corruption, global economy. It leads to failed with a report in 2009 exposing how states, breeds terrorism, some of the world’s largest banks and threatens the national security had done business with some of of wealthy countries and others the world’s most corrupt regimes.2 around the world. In February 2015, the leak of The largely hidden truth is that documents from HSBC Switzerland banks play an integral role suggested that one of the biggest in enabling this. Corrupt officials banks in the world had enabled need somewhere to hide tax evasion on a massive and stolen money. institutionalized scale. However, The good news is that laws and HSBC’s behaviour is not a one-off, regulations apply in most countries, and is part of a much wider based on internationally agreed problem of banks failing to turn standards, which require banks to away suspect funds. A global do a range of checks to detect pattern of wrongdoing emerges: Women counselors take care of children the proceeds of corruption and from banks aiding tax evasion and suffering from severe mental trauma and anxiety at the Kassab Camp other crimes, and money intended corruption, to handling the proceeds for the displaced in Sudan’s Darfur region. Many of the children at the camp for terrorist groups. of drug trafficking and other serious witnessed their parents being killed by the crimes, to breaking sanctions laws government-allied Janjaweed militias. French bank BNP Paribas pled guilty and ignoring the risk of terrorist to breaking U.S. sanctions laws to Sudan, including funneling money to the Sudanese 4 ....... financing. This report concentrates regime. © Gary Knight/VII/VII/Corbis ---------------------------------------------------- “If large financial institutions can break the law and accumulate millions in profits and, if they get caught, settle by paying out of those profits, they do not have much incentive to follow the law”. ELIZABETH WARREN, U.S. SENATOR, DEMOCRAT, MASSACHUSETTS 3 ---------------------------------------------------- on the role banks play in enabling profit even if they take embezzled responsibility for banks’ rule- corruption, how this is part of or other illegitimate money. breaking, many banks will the wider pattern of rule breaking There are several reasons for this: not take rules designed to prevent by them, and the impact this has. the rules are rarely enforced; corruption, and other crimes, However, banks are just one part where penalties are handed out, seriously. Until then, corrupt of the puzzle. Global Witness they usually do not go far officials will continue to plunder has highlighted the role of other enough; and, senior executives state assets, tax cheats will carry professional service providers, who have oversight of breaches on evading their taxes, and other such as lawyers and accountants, rarely face financial or reputational serious criminals will continuing that may also facilitate corruption consequences themselves. It can committing their crimes, and serious crimes.4 make sense for banks to break the knowing that they can use banks rules under the present system. to get away with it. There are two main questions. Why are many banks repeatedly We need to change this balance breaking the law and other of incentives, so that banks have regulatory standards, and what can much more to lose than they be done to change this? have to gain from handling suspect funds. The most effective way CHANGING THE INCENTIVES to do this is to hold senior Skewed incentives lie at the root bankers personally responsible of the problem. Under the current when their banks break the rules. system, banks can make significant Until senior bankers face personal ----------------------------- * Adopt a much stronger, have the overall responsibility SUMMARY OF and smarter, approach for anti-money laundering RECOMMENDATIONS to enforcing anti-money regulations, as part (see p24 for laundering regulations. of a broader culture change. recommendations in full) * Significantly enhance scrutiny ----------------------------- * Establish adequate anti- of accounts held by people money laundering regulations with access to government Governments and in countries where they budgets who pose a high regulators should: currently do not exist. risk of money laundering. Remove obstacles for banks, Start holding senior bankers * * Work closely with each other, * such as difficulties personally responsible when governments and a range of in identifying the real, ultimate banks violate anti-money actors to solve key problems. owners of companies which laundering regulations. they hold accounts for. * Remove legal impediments preventing authorities Banks should: from holding senior executives personally liable for * Appoint someone from wrongdoing at banks. either board or senior management team level to 6 ....... ------------------------------------------------------ “[BNP Paribas] employees – with the knowledge of multiple senior executives – engaged in a long-standing scheme that illegally funneled money to countries involved in terrorism and genocide”. BENJAMIN LAWSKY, HEAD OF THE NEW YORK BANKING REGULATOR5 ------------------------------------------------------ ---------------------------- from compliance staff that The New York banking regulator CASE STUDY: transactions involving certain summed up the complicity BNP PARIBAS – Sudanese customers would of senior management at PROFITED FROM violate U.S. law. These concerns the bank: “violations were GENOCIDE pointed to the pivotal part particularly egregious in part AND TERROR the bank played in allowing because they continued for --------------------------- the Sudanese regime to trade many years after other banks oil and finance itself, and were sanctioned for similar In a landmark case highlighting highlighted the role that the violations; involved numerous how senior executives Sudanese regime was playing schemes expressly designed to overrule compliance teams, in the genocide in Darfur, deceive regulators; and were BNP Paribas was fined $8.9 and had played in harbouring committed with the knowledge 8 11 billion by the U.S. in June 2014. Osama bin Laden. Yet the of multiple senior executives.” The French bank pled guilty6 senior executives decided ---------------------------- to knowingly, and willfully, to take the money because breaking U.S. sanctions the business was too good to 9 laws with respect to funds turn down. originating from Sudan, Iran Most alarmingly, this happened and Cuba. This involved after the U.S. authorities concealing more than $190 had already identified failures billion of transactions for clients by BNP Paribas to comply with 7 subject to U.S. sanctions. money laundering and sanctions Evidence published by the laws in 2004, and ordered Department of Justice showed it to sign a Memorandum of BNP Paribas, France’s largest bank was that senior executives at the Understanding agreeing to fined $8.9 billion by U.S. authorities in 2014. bank ignored several warnings improve its compliance with Flickr: dierk schaefer these laws.10 ....... 7 ------------------- T H E CO S T O F CO R R U P T I O N I N THE DEVELOPING A N D D E V E LO P E D WORLD -------------------