Tuesday, 21 February 2017

HSBC’s Embracing of the ‘Retreat of Globalisation’: The Potential Effects of a Controversial Track Record

In covering the continuing release of the annual results of the leading U.K.-based banks, the business press turned their attention towards HSBC as it began the week of financial reports, with Lloyds due on Wednesday, Barclays Thursday, and RBS and Standard Chartered both on Friday. Although there is plenty of analysis to be had regarding the 62% reduction in profits, this short post will focus on a particular line contained within an interview with the Chief Executive of the Bank, Stuart Gulliver. Speaking of the risks posed to the bank moving forward, he stated that ‘if Globalisation continues to retreat, as seems likely, we are in a strong position to capitalise on the regional opportunities that this will present, particularly in Asia and Europe’. The question for this post is this: ‘what standards, and what culture, will HSBC be bringing to these regions when it seeks to capitalise upon the retreat of Globalisation?’ When looking at the Bank’s recent record, particularly when it comes to Money Laundering, the question has merits because, if it seeks to approach these jurisdictions aggressively in the wake of an increase in regionalisation, then how it does so will be extremely important to understand – mainly so that some form of protection can be put in place to mitigate the damage that money laundering causes.

If we proceed on this premise that HSBC, a huge banking institution, will have a massive role to play if the secession of Globalisation does continue, then understanding its recent past is important. Unfortunately, the recent past of HSBC is dominated by transgressions which, in reality, lead to the conclusion that a regionalised world, with each particular territory vying for success (arguably via the increased incorporation of financial services without increased oversight), will be fertile ground for systemically-dangerous transgressions to continue, and even develop further. Yesterday’s post in Financial Regulation Matters, on the transgressions of RBS, which include the despicable practice of driving SMEs to failure and then profiting from the damage, was concerned with looking at the effect of the transgressions on the economy, and therefore society. With HSBC – a bank which has a much different composition to that of RBS – the transgressions are, arguably, much more sinister in nature. Whilst there are a number of financially-concerned transgressions recently that have come to light – the story of HSBC having to set up a £4m compensation scheme for overcharging customers via its subsidiaries, HSBC’s €33m fine for partaking in a cartel that rigged the Euribor, or the massive tax scandal concerning HSBC’s Swiss affiliates, providing just three examples – it is the Bank’s approach to the proceeds of crime and money laundering that causes the most concern.

In 2012, the bank agreed to pay $1.9 billion to U.S. authorities to settle claims that it ‘exposed the U.S. financial system to money laundering, Drug (and) Terrorist financing risks’, which is an extraordinarily strong indictment of its activities. The Permanent Subcommittee on Investigations concluded that ‘due to poor AML (anti money laundering) controls, HBUS (HSBC’s U.S. affiliate) exposed the United States to Mexican drug money, suspicious traveller’s cheques, bearer share corporations, and rogue jurisdictions’, whilst also adding that ‘HSBC’s compliance culture has been pervasively polluted for a long time’. This uniquely sharp rebuke would, one imagines, instigate an accelerated response to shoring up defences against such transgressions, but last year it was reported that this is simply not the case. Reporting last year, the British Press announced that Michael Cherkasky, an American lawyer appointed to HSBC as one if its foremost compliance monitors (as part of its settlement with the Department of Justice), had raised ‘significant concerns’ as to the pace of the changes required to shore up its defences. The Guardian also reported that HSBC had taken to hiring ‘princelings’, which it describes as the hiring of the children or younger relatives of China’s political leaders or of powerful executives at state-owned enterprises in China – clearly to gain favour in the region – which brings us neatly back to the claim made by Stuart Gulliver regarding the bank being primed to take advantage of the regression of Globalisation, particularly in Asia.

HSBC’s extraordinary reach across the globe, rightly earning it the title of a truly multinational bank, means that the standards it sets have a real-world effect. The careless attitude to money laundering, and dealing with rogue states etc., is a particularly dangerous aspect of a bank that seeks to ‘capitalise’ upon the regression of Globalisation. The regression, which apparently seems to be accelerating by the day with protectionist sentiments being offered in the U.S., the U.K., and increasingly within Europe, will lead to the reduction in oversight and regulation, as states vie to be prosperous in uncertain times; when we understand this in relation to the ethical fibres of the world’s leading financial institutions, then it is difficult to be positive. The fact that HSBC, RBS, and other financial institutions have just continued to transgress regardless of the public uproar after 2007/08 simply highlights the contempt that these organisations show for the welfare of society. Whilst absolute supervision and invasive regulation is politically impossible in this increasingly politically-conservative world, there is a growing need to increase the personal ramifications for transgressing within these institutions. For example, part of Stuart Gulliver’s pay is measured against the firm’s compliance ratings, and the recent drop from 75% to 65% resulted in a 2.5% cut in earnings, although his pay is actually rose from £7.3m to £7.7m because of performance measured against other areas of the business – in what way is this an incentive to oversee an effective compliance regime? The only way forward to truly effect a change in culture is to make people personally liable for their transgressions; the sanctity of the corporate veil is simply not supposed to protect against personal failings of this nature. Unfortunately, the deterioration of Globalisation plays right into the hands of those who prey upon their strategically-superior position and, with the increase in regionalisation, their position is becoming increasingly superior. 

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