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Banks’ money-laundering, rate-fixing, mis-selling will not be deterred by mere fines

So Standard Chartered gets away with hiding $250bn (£160bn) of Iranian funds in illegal transactions over nearly a decade by ‘agreeing’ to pay a fine of £340m (i.e. 0.13% of the money laundered). Another way of putting the fine in perspective is that it represents about 4% of the bank’s annual pre-tax profits (StanChart’s pre-tax profit in the first half of this year was $4bn). So what’s the lesson in all this for the bank?

For nearly 10 years it illegally distributed enormous forbidden funds through the US financial system, no doubt charging the Iranians at a high premium $multi-billion rate for the risks involved, and very nearly got away with it. Then, once exposed, the bank claimed that the New York Dept of Financial services was “talking rubbish” and payments of only $14m were at fault, yet when threatened with court proceedings the bank’s chief executive, Peter Sands, then immediately pays out $340m, 24 times as much. Third, StanChart is a British bank, but the British authorities were apparently asleep at the wheel (as usual), and it was only the US law enforcement agencies that brought the bank to book.   Lesson: cheat, deceive, cover up, lie – it’s well worth it.

If financial malfeasance on this industrial scale is ever to be ended, it certainly won’t be stopped in its tracks by a fine which is a tiny fraction of its annual profits or of its illegal gains from its lawbreaking. Clearly, if it is to be an effective deterrent, the illegal gains should be paid back in full, even if it takes several years, otherwise the incentive to illegal activity still remains. But the real deterrent lies, not in attacking the bank’s profits (indeed why should the shareholdefrs be targeted?), but rather in going for the senior management who perpetrated the wrongdoing in the first place. There is an increasing scale for doing this.

Senior executives who are held responsible can be disqualified from any management role within the finance sector for a limited period (5-10 years) or for life. For the most serious offences they can be given a lengthy custodial sentence: in the US there are 20-year sentences for money-laundering – why not in the UK? Going further up the scale, the State should take a residual power to remove a tier of top management which has allowed (even colluded with) huge lawbreaking or recklessness to take place.

Even if a bank remains in the private sector, its role in Britain’s key finance sector is so crucial that the State should lay down and enforce the bottom line for ethical and competence standards. Even Simon Walker, head of the Institute of Directors, said two months ago that it was ‘high time for a clear-out of the leaders who created this mess’. And of course, as the US Justice authorities are now doing (and why not in the UK also?), regulators should have the ultimate power to withdraw the licence for a bank to operate.

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