Unscrupulous banks should be sent on a correspondents' course


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Outlook Are millions of the world’s poorest people being cut off from the global financial system as a consequence of the enormous fines levied on banks that allowed themselves to be used as conduits for the laundering of dirty money? This is the disturbing issue raised by the Bank of England Governor, Mark Carney, in a article published in the Financial Times.

Mr Carney makes the point that it is impossible for any bank to have a presence in every city, town and village in the world (although HSBC – one of the banks so fined – was, at one point, attempting to do that). So they rely on “correspondent banking”, which allows a local bank to facilitate customers’ access to a range of services, such as currency exchanges or money transfers to overseas accounts, provided by often distant financial institutions.

The local “respondents” are supposed to have systems in place to prevent the big “correspondents” from acting as conduits for illicit funds. As we all know, this hasn’t always worked well in practice.

In the wake of the fines that have been levied on a number of banks, the chastened correspondent has a choice. It can fix the problem, or it can cut links with its respondents and stop dealing with any part of the world deemed to be risky. Care to guess what’s happening? The consequence of the latter is that people in desperate need of financial services are cut adrift and shut out of the global financial system; any hopes of pulling themselves out of grinding poverty are left stillborn.

The World Bank has been despatched to investigate the problem and find out how widespread it is. When it has done that job, it is to be hoped that it will name names, because banks washing their hands of this issue – rather than making efforts to fix it – are behaving in a cynical, lazy and immoral manner.

However, it is an entirely legal manner, hence the need for regulators to play a role here. Terrorists, criminals and rogue regimes have proved themselves to be remarkably resourceful when it comes to finding ways to circumvent control systems that are considered state of the art. The very best that even the most willing respondent institutions are able to offer will inevitably fall short of that particular benchmark.

But where big financial institutions have made every effort to obey the rules, where they have performed adequate due diligence upon respondents they transact with, and have ensured that their control systems are up to date and capable of spotting suspect transactions, they should not run the risk of being penalised if something bad slips through the net.

What might help would be an agreed set of international standards for what is expected of them, under the auspices of the international Financial Stability Board, which Mr Carney chairs.

Such standards will inevitably require a certain amount of compromise on the part of international regulatory authorities, and that includes those operating on US soil. But if they can do this there would be no excuse for the banks. We would also be able to see those that still won’t play ball for exactly what they are.