A little over a decade ago, Somali pirates seized a Spanish tuna fishing vessel off the coast of east Africa. The ransom demand came in and a family friend was asked to mediate. The Spanish owners decided to pay up to release the boat and its crew, and the funds were routed as directed to the kidnappers.
What astonished my friend almost as much as the ship’s capture was what happened next. Lawyers were instructed in London for both parties and the ransom money was transferred through UK accounts at leading banks. No one in the City blinked, despite what was clearly a criminal operation. The professionals took their hefty fees and turned a blind eye. The pirates got their money and the boat was freed. The whole process ran as smoothly as if it had been a legitimate enterprise.
I was reminded of the tale by an official government report this week warning that “many hundreds of billions of pounds of international criminal money is almost certainly laundered through UK banks and their subsidiaries each year”. Laundered money finances terrorism, the Home Office and Treasury said, so “poses a significant threat to the UK’s national security”.
The observation is hardly new. Somali pirate money helped to finance the Islamic terrorist group al-Shabaab, which killed nearly 70 people in a Nairobi shopping centre in 2013, including six Britons. What is new is that the authorities are stepping up their fight to shut down the criminals’ financial networks, and banks are in the front line. Stating the obvious, the report said that “a lack of funds can have a direct effect on the ability of terrorist organisations to operate and to mount attacks”.
Beyond national security, the credibility of the City is at stake. It’s one thing for banks to rig foreign exchange markets and fleece customers with payment protection insurance, another to be exposed as facilitators for beheadings by Islamic State or human trafficking. In July, David Cameron took up the baton, warning that “the UK must not become a safe haven for corrupt money from around the world”.
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Pressure has piled up on the banks since the United States launched a crackdown on dirty money three years ago. HSBC was fined $1.9 billion for laundering funds for “drug kingpins and rogue nations”. Standard Chartered was hit with $667 million for violating US sanctions with Iran. Largest of all was a $9 billion penalty for BNP Paribas for running an eight-year “scheme to illegally move billions through the US financial system” for banned countries.
The US wields the ultimate punishment: it can bar a bank from dollar transactions, cutting it out of 80 per cent of global trade finance and 45 per cent of all global payments. Full dollar prohibition, as BNP was threatened with, would kneecap a bank. When the US suggested new sanctions to kick Russia out of the Swift international payments system, one of President Putin’s banking cronies said that such a move “would mean war”.
With governments breathing down their necks, lenders are falling into line. They have vastly beefed up financial crime compliance departments and are helping the authorities. HSBC and Standard Chartered are among 20 institutions working with the Bank of England and the Home Office to pass on information about suspicious activities through the Financial Sector Forum.
As one senior executive told me, if they find a client running lots of money through the likes of nail bars and hand car washes (apparently the UK’s go-to money-laundering businesses at the moment), the authorities are alerted. Information passes the other way as well, so banks can track the financial movements of suspected criminals. The Home Office insists that the arrangements don’t breach data privacy laws, but the unprecedented scale of co-operation demonstrates how precious officials believe the banks could prove in the fight against crime. More than 360,000 suspicious activity reports were made last year by banks, lawyers and accountants.
Some bankers complain that they are being co-opted into acting as an unofficial global police force, that governments are outsourcing the work to the deep pockets of the financial industry. There is something in that. The National Crime Agency had a total operations budget of £230 million last year, so it could do with more financial muscle. The crime fighters also freely admit they are in uncharted waters, making the industry’s expertise invaluable.
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Yet the impression that the banks are complicit — and so have a responsibility to help — is hard to avoid. The leak this year of HSBC’s Swiss private bank accounts revealed a client list that included people suspected of involvement in diamond smuggling, corruption and drug trafficking.
Pressure on banks to clean up their acts has been mounting. Under the “know your customer’s customer” rule, they can face prosecution even for lending to a client that itself services a money launderer. Banks are so worried about inadvertently breaking the rules that they have pulled valid correspondent banking relationships, cutting off parts of the developing world in the process.
Knowing your customer’s customer may be a regulatory step too far, but there is little doubt that banks should be doing more. In the fight against terrorism and organised crime, financial weapons can be as mighty as guns — with far fewer casualties. For too long, as my friend found out, banks have turned a blind eye. Not only does that threaten to tarnish the reputation of the City, it’s not great for Britain.
Philip Aldrick is Economics Editor of The Times