Scare stories of controversy

Ask any financial practitioner in Malta about difficulties they encounter when opening bank accounts, particularly for foreign clients, and you will be convinced that the prevailing risk averse attitude is making life difficult.

As an island, we obviously face competition from mainland Europe to attract foreign direct investment, and conscious of our anti money laundering (AML) obligations we also have to be careful not to gold plate regulations when dealing with inflows and outflows of funds using banks.

One hears of local banks requesting not only regular due diligence papers but insisting that as a condition of opening an account, the foreign investor starts right away employing a set number of staff and transfers a substantial deposit, apart from the minimum share capital.

These rules assume Utopian conditions meant to apply before the onset of global recession when attracting blue chip companies was easy and Malta had a choice of abundant investors gate crashing at the airport with fat cheques to burn. The other side of the coin is that banks abroad have been caught in scare stories of controversy and starting with those in UK a number were found guilty of claims of mis-selling and other abuses.

This has led to the regulator in Malta tightening the screws and obviously the FIAU is marshalling orders to see tighter scrutiny on applications to open and operate bank accounts. Is this a case of closing the barn door after the horse has bolted?

In the UK, the Financial Conduct Authority is on record declaring that 11 lenders and card issuers had voluntarily agreed to compensate customers for abuses of mis-selling financial products, typically Lloyds bank has so far set aside £11.3bn for compensation to cover refunds on the mis-selling of PPI, a loan insurance – more than any other bank – and Barclays, Royal Bank of Scotland and HSBC have also set aside billions of pounds in compensation, which will have a knock-on effect for their balance sheets.

Simply put one can explain that PPI is payment protection insurance, also known as credit insurance, best described as an insurance product that enables consumers to insure repayment of loans if the borrower dies, becomes ill or disabled, loses a job, or faces other circumstances. The sale of such policies was typically tied to payment of large commissions as the insurance policy would commonly make the bank/provider more money than the interest earned on the original loan.

Certain banks guided staff to say only that the loan was “protected” without mentioning the nature or cost of the insurance. When challenged by the customer, they sometimes incorrectly stated that this insurance improved the borrower’s chances of getting the loan or that it was mandatory.

In relation to PPI mis-selling, Barclays set aside £3.95bn while we read that Royal Bank of Scotland has taken a total charge of £3.1bn. Other abuses involved a Libor-fixing scandal by Barclays.  Its chairman,  John McFarlane, was quoted to say that:

“Barclays remains far too hierarchical, bureaucratic and group-centric to deliver the required outcomes. I therefore want to see much more streamlined processes.”

McFarlane wants to consolidate its many markets into three core areas that is Britain, USA and South Africa by scaling back exit countries not making a clear competitive advantage. In a well designed strategy he plans to cut costs as a percentage of income down below the high rate of 70 per cent, principally by slashing costs and cutting staff numbers.

One notes how Barclays closed 98 branches in Britain and started a three-year plan to cut 19,000 jobs by the end of 2016, including 7,000 in the investment bank. Another bank, this time Lloyds, decided to shed 9,000 jobs and close 200 branches as the British government is scaling back its stake to 20% by placing up to £3bn of Lloyds’ shares on the stock market.

Next we meet Royal Bank of Scotland, (80% owned by the State) which in connection with the discovery of its loan mis-selling scandal, has confessed to misleading small business customers as part of the £2.3bn of loans the bank has made under the Enterprise Finance Guarantee (EFG) scheme. It has been the biggest user of the EFG scheme, which was set up in 2009 to encourage additional lending to small and medium-sized enterprises.

But more sensational news was revealed in the international press thanks to one whistleblower and a team of 140 global journalists (code named ICIJ). Two years ago, they opened the lid of a Pandora box containing secret Swiss accounts and lifted names of owners who found such egg nests useful in their tax planning arsenal. It comes as no surprise and with a touch of envy that Swiss banking secrecy has lured many illuminati  (including a few hundreds from Malta) to accumulate and protect their wealth.

Not all were honest persons trying to hide their hard earned riches from prying eyes of home dictators, as these also included drug traffickers, arms dealers, and terrorists wanting to launder money and create financial infrastructures that have made them look less like criminal gangs operating in dirty cash and more like fresh faced enterprises earning interest, making investments, and sending electronic transfers.

Conspiracy theories abound about corrupt governments, their Mandarins / officials and how these embezzled money and robbed the people they’re meant to serve. Regrettably these are no longer theories any more but true stories leaked by recent investigations instigated by a team of global journalists in the Swiss Leaks project of 60,000 files that provide details on over 100,000 HSBC account holders.

It is now widely acknowledged that it was not until 2011 that action by HSBC Group was taken to bring the Swiss branch into line.

In another controversial case one meets the story of millions stashed away belonging to Emmanuel Shallop, who was subsequently convicted of dealing in “blood diamonds”, the illegal trade that helped propel war in Africa. Paradoxically, an internal memo reads as follows: “We have opened a company account for Emmanuel based in Dubai… The client is currently being very careful because he is under pressure from the Belgian tax authorities who are investigating his activities in the field of diamond tax evasion. One recalls in the ICIJ files how diligent bank employees discussed with clients a range of measures that would ultimately allow clients to avoid paying taxes in their home countries.

HSBC, the world’s second largest bank, has admitted wrongdoing by its Swiss subsidiary. “We acknowledge and are accountable for past compliance and control failures,” the bank said in a statement to The Guardian. The Swiss arm, the statement said, had not been fully integrated into HSBC after its purchase in 1999, allowing “significantly lower” standards of compliance and due diligence to persist.

Surely this is a lame excuse, given that strict rules set by Basel 111 applied without exception to Swiss banks monitored by regulators. Furthermore The Guardian discovered how in a smart marketing tactic HSBC actively created schemes which were likely to enable wealthy clients to avoid paying taxes and colluded with some to conceal undeclared accounts from domestic tax authorities.

HSBC was contrite saying: ‘We apologise, acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong.’ The bank says it has sharpened up its controls and doubled spending on compliance to £255 million.

To conclude one admits that banks in Malta did not indulge in such abuses and overall regulation by MFSA was effective so while we must remain diligent in our quest to filter against infringements of AML and good governance rules, can we ease the pressure on practitioners who after taking every precaution prescribed at law venture to assist investors to open bank accounts to conduct legitimate business. Anything else will be shooting ourselves in the foot.