Posts Categorized: Banking ethics
July 30 2020
Last week Parliament’s Intelligence and Security Committee wrote about how Russian oligarchs and their money had been welcomed by the UK from the mid-1990’s onwards, with Britain’s “light touch … regulation” (where have we heard that before?). The UK’s rule of law and judicial system were seen as a particular draw. But, as the report says: “few questions – if any – were asked about the provenance of this considerable wealth.” Oh dear.
The report says that, rather than the encouragement of ethical practices and transparency amongst the Russian investors as hoped, Britain’s institutions provided “ideal mechanisms by which illicit finance could be recycled through what has been referred to as the London ‘laundromat’”. The patronage and influence this money brought to “willing beneficiaries” helped the reputation laundering process. And then there are the enablers, described with some asperity, as those who “on occasion help launder money through offshore shell companies and fabricate ‘due diligence’ reports”. Dear oh dear.
The authorities do have some ways of countering this: Unexplained Wealth Orders, for instance and seizure of assets. How well these work is another matter, of course. The Court of Appeal recently overturned three UWO’s obtained against the family of the former president of Kazakhstan, now subject to appeal by the National Crime Agency. The NCA may win its appeal but, as stated in the report, there is an imbalance of resources between the NCA and those with the wealth to fight back. And the longer the money is around and channelled through companies, property, trusts, charities and the rest, the easier it is to disguise its original smell and explain it away – enough to fight off the UWO, anyway.
There have been some successes: in relation to the spending (£11 million on a townhouse, £16 million spent in Harrods over a decade) by the wife of a former chairman (and convicted fraudster) of a state-owned bank in Azerbaijan, for instance. Or the seizure by the City of London police of £2 million in cash held in British banks by a professional money launderer acting for the Calabrian mafia, the ‘Ndrangheta, after a two-year investigation.
Three points are worth noting:
- One of the weakest points of any system is the point of entry. Much easier to keep “dirty” money out than to try and get rid of it once it is in and, over time, made to appear respectable or, at least, explained. Ditto re dodgy individuals.
- Once in, getting rid of the dodgy individuals and money risks becoming a game of Whack-a-Mole, one which tests the patience and resources of the authorities and requires their relentless and sustained focus.
- Be wary of those seeking to use the credit and reputation you have built up over years. That applies to professionals as much as it does to countries. It is flattering to think you will teach and improve them. The grubby reality may be that it is your reputation which is tarnished. It’s an old problem: some well-established banks and professionals learnt this the hard way – with one Robert Maxwell back in the early 1990’s. It’s a lesson worth remembering rather than relearning.
One thing is puzzling though. For years – since at least 1994 – there have been money laundering regulations, with the latest iteration brought in last year. The level of information needed is onerous and extensive. The principle underlying all these rules and regulations and the concept of due diligence is that banks and lawyers and estate agents and the myriad of intermediaries should really know and understand their customers and where their money comes from. So how is it that, even now, a couple of Calabrian Mafiosi are able to set up a company that does nothing, give an address where they do not live and deposit £2 million in an English bank account?
Surely it is not because, as reportedly attributed to Anarchasis, a Scythian visitor to 6th century Athens: “Written laws are like spiders’ webs; they catch the weak and poor but are torn in pieces by the rich and powerful.”
January 23 2020
One of the saddest aspects of the One Coin scam perpetrated by the now missing Dr Ruja Ignatova is how unsophisticated (and, indeed, poor) savers in African countries were specifically targeted using the claim that this wonderful new cryptocurrency technology would bring easy finance (and all its many advantages) to the unbanked. OneCoin was presented as practically a social service and a revolution in finance which would transform the prospects of those whom traditional finance providers had ignored.
All too good to be true?
Of course. And what this meant in practice for those believing these claims can be heard here in the BBC’s radio documentary – The Missing Cryptoqueen. What it also meant for those involved in handling the money she made was rather more traditional – convictions for fraud and money-laundering.
Investors believed what they hoped was true and failed to ask some basic and obvious questions. If there was no blockchain how could this new currency really be a cryptocurrency? And what was the track record of the person behind it? If they had, they might have learnt that there was no blockchain and that Dr Ignatova had form, having received in 2016 a suspended sentence and fine from a German court for her role in relation to a German metallurgical factory taken over by her, asset stripped and then left to go bankrupt in 2009.
Past performance can sometimes be a guide to the future, it seems.
So what might an investor make of an opportunity to invest in a new venture which will:-
- Package new and existing mortgages into securities to be sold to investors
- The mortgages to be sold to people who have a low uptake of these products, preferring to use their savings to buy land and build property
- In a country – Ghana – with high interest rates and a very recent banking crisis, which resulted in 7 Ghanaian banks collapsing
- On the basis of a study, whose authors have not been revealed, which apparently states that there are plenty of people able to afford a $50,000 mortgage among the 9 million Ghanaians earning more than $11 a day (a munificent annual income of $4,015)
- Promoted by a convicted fraudster (responsible for the UK’s biggest fraud). Yes, Kweku Adoboli is back (though this time it is the economy of Ghana he plans to grow and the balance sheets of (presumably) the remaining Ghanaian banks he wants to expand)
- Who declines to say who his business partners are
- But expects banks to be shareholders in the new venture (assuming actual and potential conflicts of interest can be properly managed)
- And who is still being economical with the actualité of the reasons why he was convicted and imprisoned.
But it is good to see that he has developed a sense of humour – if this quote is genuine: “The day when I deliver my first profit to someone, that will be a good day.”
The injunction “Let the buyer beware” is as sound as ever.
Back to Basics
July 30 2019
Ever since the financial crisis started there has been a plethora of explanations about why traders and bankers behaved as they did. Some have been purely descriptive: what happened and when, allowing us to marvel at the folly of it all, at least in hindsight. At the time these clever financiers were praised by pretty much everyone from Chancellors down. There were very few pointing out at the time that the Emperor had no clothes.
But increasingly there have been attempts to use the insights gleaned from other disciplines to explain why what happened in the way it did. The latest neuroscientific findings were used to describe the biology of boom and bust (The Hour Between Dog and Wolf, for instance). Behavioural economics has had its say, as has nudge theory. Rather than nudging people to behave well, all the payment and reward incentives nudged financiers into doing what suited them financially irrespective of the effect on the customer and no matter what the expressed good intentions of the firm were. Goodness! Whoever could have predicted that, without a theory to explain it.
Psychologists have had their say, of course, though only a cynic might wonder about how much actual knowledge about the realities of life in the financial sector they have. No matter: all could opine merrily on the importance of culture in finance and on all the wonderful insights that these disciplines could bring to those seeking to manage and regulate the financial sector.
And now the anthropologists have got in on the act, as in this article by Gillian Tett. In it she points out how anthropologists have tried to analyse the cultural patterns, the rituals and symbols, even the words people use in finance to understand what was going on under the surface. In truth, the insights brought by anthropologists (at least as described here) are pretty obvious rather than thought-provoking; the article does not need them to be worth reading.
What is interesting, though, is how commentators on finance and perhaps also regulators are, perhaps unconsciously, making the same mistake as many of those traders and bankers. They are over-complicating, coming up with all sorts of theories and hypotheses apparently grounded in science or other social studies, described and interpreted by experts, using technical language to describe common human behaviours. Just as too many traders developed over-complicated products which they only half-understood and managers kidded themselves into believing that they had found a foolproof solution to valuation or risk management or any of the other difficult tasks they had, so there is a risk of developing overly complex explanations for why so many people behaved so stupidly or worse. The risk is that the more complex the explanation, the more people feel that it is all too difficult really to do anything about it or that this is something best left to the culture specialists, psychologists and other “ologists“.
Keep it simple might be the motto. In the end, by whatever means the conclusions are reached, what everyone in finance needs to remember is this:-
- Trust is at the heart of finance.
- Everyone in a financial institution is, in one way or another, managing risk. There is no such thing as a risk-free product or institution. Or, indeed, individual. Understanding the risk you are running and managing it properly is what every bank, every employee in a bank, every customer of a bank, every shareholder in a bank, every investor in a financial product and every regulator of a bank is doing. Or ought to be doing.
- Understanding properly is hard work. There is no magic bullet, algorithm, theory, process, spreadsheet, AI or killer piece of management information which will do it for you. Thinking is often required.
- There is no way of eliminating risk. Mitigating and minimising it: yes. Eliminating it: no. If anyone says otherwise (and much of the financial crisis was caused as a result of clever people thinking they had done just this and learning, painfully, that they hadn’t) they’re a charlatan or worse.
- Human beings, even clever ones (particularly them, it sometimes seems) do not behave rationally around money. Money and emotions are bosom pals. As any decent novelist or lawyer dealing with divorces or wills will tell you. The “animal spirits” Keynes described do not just apply to market participants but to all of us.
- Managing people, understanding them, motivating them, inspiring and leading them, teaching them, setting them a good example, setting them high expectations and making it clear what the boundaries are, what behaviour will not be accepted, what crosses the line, helping them get past their frailties, working effectively with them is hard work, the hardest work anyone ever has to do. And by far the most valuable – and rewarding.
- Finance is there to serve others, not itself. It is a means to an end and the moment it (and the people in it) start thinking of themselves as indispensable, as set apart from the society they are part of, as entitled to special consideration and immunity from challenge is the moment when hubris sets in. Nemesis will surely follow.