Britain’s financial regulators are still asleep and more scandals could follow, warns Prem Sikka
The banking crash exposed the “London loophole” – a phenomenon
associated with feather-duster regulation and ideology where regulators
do little to check predatory practices. Nearly five years on and despite
vast bailouts, the regulators in Britain have shown little backbone or
interest in cleaning-up predatory capitalism.
Rather than taking responsibility, the United Kingdom is dragged
along by others. Recent exposure of money laundering and London
Interbank Offered Rate (Libor) are just the latest manifestations of a
crisis which shows that this country lacks the structures and the
political will to curb predatory capitalism.
Any mention of effective regulation sends corporate elites into a
cold sweat. They use their chequebooks to fund political parties and
find jobs for former and potential ministers with the aim of stymying
They refer to the bogey of higher costs of regulation, even though
the absence of effective regulation has resulted in an unprecedented
The elites forget that the state is the ultimate sponsor of
capitalism, and has to coerce and cajole corporate beasts to curb their
self-destructive tendencies. That lesson has been learned in the United
States, supposedly the home of free markets, but not in Britain. Here
are some recent examples.
In August 2012, the New York New York State Department of Financial
Services claimed that, for 10 years, the Standard Chartered Bank schemed
with the government of Iran and hid from regulators roughly 60,000
secret transactions, involving at least $250 billion. It collected
millions of dollars in fees, but left the US financial system vulnerable
to terrorists, weapons dealers, drug kingpins and corrupt regimes, and
deprived law enforcement investigators of crucial information used to
track all manner of criminal activity.
The report added that the bank carefully planned its deception and
was apparently aided by its consultant, Deloitte and Touche, which
intentionally omitted critical information in its “independent report”
to regulators. Standard Chartered has agreed to pay a fine of $340
million. Britain’s regulators have done nothing.
In July 2012, a 300-page report by the US Senate Permanent
Subcommittee on Investigations said that HSBC circumvented banking rules
designed to prevent financial dealings with Iran, North Korea and
Burma. Its lax systems and controls also facilitated financial movements
for drug cartels and terrorists. The bank is accused of failing to
monitor some $60 trillion of transactions.
HSBC has paid $27.5 million in fines to Mexico and may be fined
around $1 billion by the US regulators. The revelations should have
resulted in probes in the UK, too, but there is no sign of much action,
aside from a belated report into the Libor rate rigging scandal
concluding that the system is broken and suggesting its complete
overhaul, including criminal prosecutions for those who try to
manipulate it – things most observers had concluded rather earlier.
In June 2012, the US regulators took the lead in exposing the Libor
scandal. Barclays Bank paid a total fine of £290 million, including £59.5 million to the UK’s Financial Services Authority, to settle
allegations of manipulating Libor and the Euro Interbank Offered Rate
(Euribor) lending – the rates at which banks lend to each other in the
wholesale money markets. Citigroup, Deutsche Bank, JP Morgan, UBS, HSBC
and the Royal Bank of Scotland are also thought to be on the US
With its reputation irrevocably tarnished by the banking crash and
its imminent replacement by the Prudential Regulation Authority and the
Financial Conduct Authority, the FSA now claims to be looking at some
banks, but so far there is no tangible evidence of this.
The UK is a soft touch compared to the US where the Securities
Exchange Commission and Department of Justice have shown some
willingness to investigate, prosecute and fine corporations, although
the scale and severity of this have been insufficient to curb predatory
In contrast, the UK regulatory impulse is to protect elites by
sweeping things under dust-laden carpets. A couple of examples serve to
illustrate these points.
Sani Abacha, the late Nigerian dictator is estimated to have looted
between $3 billion and $5 billion of public money. Despite the extensive
anti-money laundering legislation, most of the loot ended up in Western
banks. Around $1.3 billion is estimated to have passed through 42 bank
accounts in London. Unlike Switzerland and even Jersey, the British
Government has neither named the banks nor repatriated the stolen money.
The Bank of Credit and Commerce International was the biggest banking
fraud of the 20th century. The Bank of England, then the banking
regulator, closed it in July 1991.
Some 1.4 million depositors lost around £7 billion of their savings.
In the US, Senate hearings were held and the CIA published some of its
reports on BCCI’s activities. A US Senate Committee report concluded
that the Bank of England and BCCI auditors Price Waterhouse (now part of
PricewaterhouseCoopers) were engaged in a cover-up”.
It also released 99 per cent of a report, censored by the Bank of
England, codenamed the Sandstorm Report, which described some of the
frauds and named the wrongdoers and various movers and shakers.
However, the Sandstorm Report has remained a state secret in the UK. Various parliamentary committees held hearings on the BCCI scandal, but none were given sight of the Sandstorm Report.
Last year, after some five-and-half years of legal battles against
the Treasury and the Information Commissioner, I managed to secure the
names of the wrongdoers and some related parties.
These included members of the Abu Dhabi royal family, prominent
Middle East businessmen, the head of Saudi intelligence, prominent
political advisors and even the biggest funder of al Qaida, then
considered to be an organisation friendly to Western interests.
Evidently, the British Government prioritised the appeasement of
commercial interests over its citizens’ right to know, or even the
desire to create effective banking regulation.
The UK lacks an effective regulatory system and a political culture
to curb predatory capitalism. Its patchwork quilt of regulators includes
the Financial Services Authority (and its successor bodies), the Bank
of England, the Serious Fraud Office, Her Majesty’s Revenue and Customs,
the London Stock Exchange, Office of Fair Trading, Financial Reporting
Council and myriad private sector regulators.
They are poorly equipped to call multinational corporations to account.
With an annual budget of £37 million, the SFO is incapable of
mounting effective corporate prosecutions. In contrast, the US SEC has
an annual budget of $1.3 billion.
Almost all of Britain’s watchdogs come from the private sector and
are usually too sympathetic to the games played by corporations. After a
stint as a regulator, they return to the private sector and know the
hands that they must not bite.
The UK’s patchwork system encourages duplication, buck passing and
obfuscation. And it is hard to think of any timely intervention by any
Britain needs to replace the ineffective patchwork of regulators with
its own equivalent of the SEC, which could be called the Business and
Finance Commission. This would need to be controlled by a board
representing a plurality of interests, including taxpayers, employees,
customers and other stakeholders, so that elites could not easily sweep
matters under the carpet.
The board should be required to meet in the open and its files should
be publicly available so that we could all judge its efficiency and
effectiveness. No document should be withheld from parliamentary
inquiries into scandals.
All political parties need to recognise that additional financial and
human resources are needed for swift investigation and prosecution of
corporate misdemeanours. Without change, the UK will not have an
effective regulatory system.
This article first appeared in Tribune magazine