Winnipeg Free Press - PRINT EDITION

Banks hide dirty laundry

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American and British banks, one after another, have been engulfed by scandal this year, leaving Canadians to admire the probity of this country's banks -- where nothing is ever found amiss.

HSBC, the venerable Hongkong and Shanghai Banking Corp., admitted this month to U.S. authorities that it helped Mexican drug lords launder $881 million in drug-trade profits. The bank agreed to pay $1.92 billion in fines and improve its internal controls in relation to drug-money laundering, sanctions-busting and other shady dealings.

"We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organization from the one that made those mistakes," HSBC chief executive Stuart Gulliver said.

Meanwhile in London, three people, including a former trader at Union des Banques Suisses (UBS) and Citigroup, were arrested Dec. 13 in connection with an official investigation of interest-rate manipulation.

Leading banks have for years been abusing the daily settings of the London Interbank Offered Rate (Libor) by submitting fake estimates of the rates they would have to pay to borrow funds from other banks. By nudging the posted rate up or down, they can raise or lower their interest costs or the value of contracts they have issued. Barclays paid a hefty fine in June and its chief executive resigned over Libor manipulation. Investigators then turned their attention to the roles of Royal Bank of Scotland and UBS, which pleaded guilty to fraud last week and agreed to pay $1.5 billion in fines to Swiss, British and U.S. authorities on account of its Libor manipulation shenanigans.

The investigations, the fines, and the resignations help to reassure the public that regulatory agencies are hard at work, keeping the bankers honest. But regulators and investigators can only deal with what they know about. The vast laundering operations of HSBC came to light only because a federal prosecutor in Wheeling, West Virginia, received a tip that HSBC was helping a local doctor launder the proceeds of Medicare fraud. The prosecutor started digging and eventually a great many abuses came to light.

HSBC management admits it did terrible things back in the old days -- 2008 and before -- but contends it has reformed itself. The public has to decide how far to believe that. Why would executives of the leading banks be more trustworthy today than they were a few years ago?

In November, HSBC reported "underlying profit before taxes" (disregarding change in the value of its own debt) of $5 billion for the third quarter of 2012, up 125 per cent compared to the third quarter of 2011. This was after a U.S. Senate report had drawn attention to HSBC's large role in money laundering. Dishonesty and the reputation for dishonesty, it appears, are not necessarily bad for business and might even be helpful.

Confidence in banks might be encouraged if the public saw that banks are enforcing standards of integrity on their employees. Personal saintliness is probably no more common among Canadian bank officers than it is in the rest of mankind or at the top levels of Barclays, HSBC and UBS. But the Canadian banking tradition of quietly covering up scandals prevents the public from knowing what happens to dishonest bankers in Canada. We know something of the scope of the problem in the U.S. and the U.K. because the authorities there took a close look and announced what they found. We also know what corrective steps have been taken.

In Canada, the slate is surprisingly clean -- so clean that it is hard to know what to make of it. Canada's banks have never liked washing their dirty linen in public for fear of undermining public confidence. But the public is keenly aware, from U.S. and U.K. experience, that banks' linen occasionally is soiled. It would be heartening to see some washing being done -- not laundering of drug profits but enforcement of integrity within the banking world.

Editorials are the consensus view of the Winnipeg Free Press’ editorial board, comprising Catherine Mitchell, David O’Brien, Shannon Sampert, and Paul Samyn.

Republished from the Winnipeg Free Press print edition December 26, 2012 A1

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