Saturday, February 1, 2014

Does Economic Crime really matter in the world today?

(This was my paper for Session 1 on 2nd September, 2013 of the 31st Cambridge International Symposium on Economic Crimes at Jesus College. Sadly, for a personal reason I could not introduce it for discussion. Today I include it in my blog.)

Governments are not keen on tackling economic crimes. The bigger the crime the greater are one’s chances of getting away. A pick pocket caught nicking a few cents is certain to be jailed for 3 years in most countries. But, if a big bank defrauds billions the bank gets away with a fine- if that.  

Vast amounts of dirty money from real estate, under and over invoicing, insurance, securities, commodity futures, arms, terrorism, tax evasion and fixing interest rates is filtered into legal channels daily, with the help of the only Holy Cow in most countries- banks. Banks profit by other dodgy means too. There are many economic crimes but I shall focus on money laundering, which tries to camouflage the proceeds of crime so that the money can not be linked to the crime.    

It is a conspiracy that must have a triad – a criminal, business executives and bankers. These are the people who break laws to transform dirty money into legal investment. A criminal Lone Ranger may have hundreds of millions, but he can use it legally only with the help of banks. And bigger the bank the more efficient, expensive and reliable its laundering services will be.

A Conference on Cooperation against Drug & Crime held in Steyning, UK in Feb, 1997 had estimated that about £2.4 trillion are laundered every year, and that drugs alone accounted for £ 600 – 850 bln.  Incredibly, fifteen years later, the UN said that same amount of money was laundered. In this interregnum volume of all kinds of criminality and businesses has increased immensely. These days when every economic activity is being estimated it is surprising that there is none for this peer of economic crimes.

The last twenty years of my service in the Government of India were spent in booking economic criminals and narcotics traffickers. What I learnt was that the bigger the economic crime, the greater the chances of escaping jail.

In the late 80s some large Indian corporate houses, against whom there was incontrovertible evidence of evading millions of £ of taxes, got away. Their smart lawyers stitched up cases in courts for decades till new bureaucrats replaced old, zeal faded and retribution was ignored. In one case against a leading cigarette manufacturer a false rape case was lodged against me to show me as a bad character so that they could take advantage of it in the tax evasion cases being fought in higher courts. They didn’t get any advantage from that but delays caused by other diversions eventually diluted the case so much that even a light tap on the wrist was not considered. Same tenderness towards too big to jail companies continues in India as much as elsewhere in the world. 

India, like 190 other countries, has excellent laws against money laundering. And here too they don’t work against the biggest offenders.  

A too self congratulatory 2012 survey of Anti Money Laundering measures in India found that in some of the parameters like Know Your Customer (KYC), Sanction Screening, Periodic Review of Customers etc India had done well. “Reserve Bank of India had fined 48 Indian Banks in six months leading up to June 2011 for violating the KYC and AML norms. ...”. India joined the Financial Action Task Force – a UK idea- in 2010.

Then, in May, a sting operation on some of the biggest banks in India – foreign and Indian- exposed this feel good survey. An Indian news channel Cobrapost wanted to deposit half a million £ in several banks provided no questions would be asked. Each transaction was filmed. Each bank guaranteed that they would launder it in such a way that no Anti-Money Laundering Authority would be able to sniff it out! India’s Central Bank - Reserve Bank of India- was stunned and quickly acted against some of the filmed banks. Twenty two banks- Indian and foreign- were fined about £5.6 mln for violating anti-money laundering guidelines.  Amongst the Indian banks was the Government owned State Bank of India and amongst the foreign were Barclays, Royal Bank of Scotland, Bank of Tokyo Mitsubishi etc.

Yet, in June 2013 at its plenary meeting FATF decided that India had done well!

No criminal economic opportunity in India is ever wasted and money continues to be laundered daily.  In India the known sources of money laundering are officially thought to be political activity, terrorism, shares, hawala and illegal corporate activities. Not a whiff about drug related money amongst the publicized reasons.

Narcotics linked money laundering cases in India ought to be many, but there are not many cases. Hashish is smuggled abroad in plenty. With quality of Indian heroin (above 60%) improving some of it is going abroad. India’s fast expanding pharmaceutical and chemical industries produce sensitive chemicals like Ephedrine, Acetic Anhydride (AA), Potassium Permangnate and many other UN watched substances, which can be misused to prepare several expensive narcotics and synthetic drugs. Thirty five liters of Acetic Anhydride, used in making heroin, can be bought legally in India for about £ 30. In Dubai or Afghanistan it will get at least £400.

Some ten years ago Dubai Customs seized a shipment of about 11 tons of Indian AA miss declared, I think, as rat poison. It was produced by an Indian firm called Mehak Chemicals. I was involved in the follow up investigation and several Indians were prosecuted here and the importer in Dubai executed, but despite requests for tracing the payment route nothing happened.  

India is one of the five largest manufacturers of synthetic Ephedrine in the world. There is a KYC protocol that is supposed to be followed by the manufacturers. Yet many tons of Indian Ephedrine are smuggled to Burma and a ton or so is seized every year in that country.  The profit is at least a 1000%. Ephedrine is essential for producing Ecstasy or Amphetamine Type Stimulants. Resultant payments are stashed with eager banks abroad.  

While preparing this paper I was surprised to find that there was only one significant drug related money laundering case. And that was in 1989. An Indian Sam Biryani was caught with 1 kg of heroin in New York. Bank transactions of $7 mln were detected in follow up investigations. That was the first and last big case of drug related money laundering in India, as far as I know. In real estate and tax evasion related money laundering, some cases have been made, but they are all minor ones.

There is willing help from abroad too.  About 70 kgs of a $100,000 psychotropic substance imported from Belgium, miss declared as a cheap chemical worth about $800, was seized by the narcotics office I was working in around 2000. Investigations about the payment route were stone walled. Belgian authorities did not help. The INCB was impotent. 

The modern day practice of criminals using banks to convert illegal money into legal started in the US in the 30s when criminal money was sent to Swiss banks and returned as loans or investment.    
                                                                                                                                                                                                                                                                                                                                                                                                               Every September in such disciplined and peaceful environment of Jesus College, Cambridge, UK are the dirty and distasteful deeds of international crimes are discussed>               

                                                                                                                                                                                                     Expectedly, it was the US that first recognized its venomous nature and introduced laws. Its first law was the Bank Secrecy Act of 1970. It was followed by the Money Laundering Control Act of 1986 and the Anti-Drug Abuse Act of November 1988. In the same month and year was passed the UN Convention Against Illicit Traffic in Narcotics Drugs and Psychotropic Substances in 1988. Its Article 5 provided for confiscation of proceeds from narcotics trafficking. The world followed with similar laws.  

 The US at that time was in the midst of the foolish War on Drugs. That country accepted that the biggest single contributor to money laundering was drug money, but quixotically attacked mainly the lowly street level drug user and pusher. Reagan in a fine hate speech in November, 1988 ignored the bigger threat from drug traffickers and money launderers and hit out at the addict. The affect is that the US still arrests one drug user/pusher every nineteen seconds, while a big time money launderer is not caught in years.

 The world kept reshaping its anti money laundering laws to keep up with digital developments. India’s anti money laundering laws of 2002 were amended five times. The penalties are prodigious, but not much effect. It is as difficult for a rich criminal to be jailed as it is for a camel to pass through the eye of a needle.  

 In these hard times banks need to be profitable. The means do not matter. Greed does. If banks protect such criminality there is little that a Government will do to check it. Drugs are reliable business. Recession cannot trouble it. The money it generates is sorely needed by banks and corporations.  Real estate, arms, chemicals, ponzi schemes have their ups and downs, but never drugs. Money matters, not principles.

I had asked my friends in Europol and Serious Organised Crime Agency (SOCA) to share some old cases that must have been made, but was surprised to draw a blank. The examples are all from the US, which country has to its credit some dedicated whistleblowers and hawkeyed journalists.

The most prominent example of a bank laundering money from drugs is the Bank of Credit and Commerce International (BCCI).   With its drug money profits it tried to take over the First American bank too. BCCI started in 1972 from Pakistan and had become by 1982 the 7th largest bank in the world, with its head offices in London and Karachi. The CIA used this bank to supply arms and finance the Afghan mujahideen and the Nicaraguan Contras. The mujahideen used the BCCI to transfer drug funds and to buy arms, with CIA’s help. By the end of the 80s the fall of the Soviet occupation in Afghanistan became imminent. The CIA thought that BCCI’s connection with drugs including the Medlin Cartel of Mexico and Cali of Colombia could eventually embarrass the US. So they pulled the plug.

In the mid 1980s the US Customs took over investigations and an undercover agent Robert Mazur got the confidence of both the Medlin Cartel and BCCI officials. By July 1991 the BCCI was history. There have been no arrests though two of its executives are still wanted. Perhaps being a Pakistan bank helped in its extermination. Similar zealousness has never again been shown while investigating banks. No Robert Mazur was sent to bring down a bank.  

The Hong Kong and Shanghai Banking Corporation (HSBC) had between 2005 and 2010 moved about £ 36 trillion across Mexico, Switzerland, Cayman Islands, Iran, Saudi Arabia and Syria. Of this money it had accepted £ 10 bln in narcotics tainted cash over two years from Mexico. In one single transaction £ 3 bln was accepted in cash. The Cartels had had special bags made so that they could be slipped through the HSBC teller windows. It was fined only £ 1.3 bln in the US in 2011. On 4th March 2013 HSBC announced profits of £ 18 bln in 2012 and gave £ 3 mln bonus to its CEO. The British Government has not even gently chided the HSBC. The stink from such collusion does not bother sniffing journalists or jurists of that emerald isle. 

In February, 2013 US Senator Elizabeth Warren raged at a meeting of the Senate Banking Committee "HSBC paid a fine, but no individual went to trial, .... How many billions do you have to launder for drug lords....before someone will consider shutting down a financial institution like this? .....If you are caught with an ounce of cocaine, the chances are good you're going to jail. If it happens repeatedly, you may go to jail for the rest of your life..." an exasperated Warren thundered into the wind.

The HSBC continues to launder money from criminal acts and tax evasion etc.. The leaks by its former employee Herve Falciani- the Snowden of banking, has thrown up numerous cases across the world. Unashamed and nonchalant, HSBC and other banks continue to pretend that nothing wrong has happened or that they will ever be touched. 

In April 2006, Mexico seized 5.7 tons of cocaine, worth £ 60mln from a jet in the Mexican port city of Ciudad del Carmen. The paper trail led to Wachovia Bank, now a subisdary of Wells Fargo. Billions of £ in wire transfers, cheques and cash shipments wewre made into Wachovia accounts. Criminal proceedings started against Wachovia but were settled out of court. Conveniently. In March 2010, Wachovia "paid federal authorities £100 mln as penalty for transactions connected to drug smuggling, and a further £45 mln fine for failing to monitor cash to ship 22 tons of cocaine. The total fine was less than 2% of the bank's £12.3 bln profit for 2009. Not a single executive was jailed.  

In June, 2013 UK Parliamentary Commission on Banking Standards' Fifth Report said bankers should in future be accountable for their actions, and their bonuses must be witheld. The Treasury welcomed the report, calling it a "very impressive piece of work." Maybe UK banks will be more accountable. Maybe they will act against HSBC! As for the USA, what can be said about a country that allowed Citigroup to draft a new bill to regulate the banking sector? ( Rolling Stone, May 2013) Senator Warren's is a lone voice in the all dominating criminalised world. 

The US "has a history of doing the right thing only after exhausting all other oprions". Maybe with growing public pressure, in a couple of decades banks in that country will not escape justice and nor will their executives. 

In the US the DEA tries at least. In 1994 there was Operation Dinero in which £ 45 million in cash, nine tons of cocaine were seized and 88 people of Cali cartel arrested. Then in 1996, a Harvard-educated economist Franklin Jurado was sent to prison for cleaning £28 million for Colombian drug lord Jose Londono. People with dirty money hire financial experts to handle the laundering process. Operation Green Ice in 1997 netted 16 tons of cocaine. In 2009 there was Operation Accelerator in which £50 mln in cash, 12 tons of cocaine and many more tons of marijuana, ATS pills etc were seized, and 755 of Sinaola cartel were arrested. But no banker. After every such case, optimistic reports claimed that they would never recover! They always did. In the past twenty years there have been about 103 DEA Operations and they only prove that drugs trafficking and money laundering continue.

The sub continent has a non banking system of transferring money abroad. Its called hawala. Money is given to a hawala agent in one country and he will honestly transfer it to a bank or person in some other country. The amounts involved were not large, but now up to half a million £ are being transferred. Their clients range from Bangladeshi, Indian and Pakistani labourers working abroad to investors, real estate magnates, merchants and drug dealers.

In Afghanistan, once again a hub of money laundering, much of the tons of cash being thrown around by NATO forces to buy information or for minor development, goes instead to buy opium and opiates. These $ land in Dubai banks, and used for criminal activities in Europe and the US.  Some of this laundered money builds the notorious and garish “poppy palaces” of Kabul, Herat and Zaranj. Everyone knows this, but the Financial Transactions and Reports Analysis Center of Afghanistan (FinTRACA) is as ineffective as similar organizations in many countries. 

Afghanistan perhaps is one of the few countries where secret service funds are being laundered, liberally and profligately. Professor Barry Rider, the organizer of these Symposia here, had said “it may often be beneficial to the State as well as to individuals, not only to keep the origin of certain funds secret but actually to disguise their provenance.” ( Insider Dealing and Money Laundering in the EU: Law and Regulation by  Dr. Richard Alexander of SOAS, London) Justification for such use is almost impossible, as it invariably leads to misuse. Perhaps Prof. Rider had CIA’s use of BCCI by encouraging arms sales and drugs trade by the mujahideen to pull down the Soviet occupation in mind. The effect of the amoral operation’s spectacular failure can still be seen from the continuing uncontrollable surge of opium production and needless bloodshed.  

There is an another popular fiction - if banks were properly led economic crimes would decrease. HSBC, the bank that laundered drug money, had been led during the eventful years from 2005 to 2010, by Revd. Stephen Green, an ordained priest in the Church of England. He did a better job of serving mammon than god. He stepped down as CEO of HSBC in December, 2010 and became a Minister of State for Trade and Investment in the present Conservative-Liberal Government.

And if a bank can be low enough to launder drug money, will it not do so for transactions that have less sinful origins? In March 2013 Argentina’s tax agency discovered that HSBC had helped its clients evade taxes and launder £50 mln in just six months. In UK there are the recent frauds by Kweku Adoboli of UBS Bank and Bruno Iksil of JP Morgan Chase. The former defrauded the £1,4 bln and was sentenced to seven years in jail- a rare feat for a banker, who must have been working alon. The latter caused trading losses of £5.6 bln, and is still free- presumably because he was not working alone.                     

    In an incisive comment Andrew Haldane, Director of Stability, Bank of England said a few years ago “..there is one key difference between the situation today and that in the Middle Ages. Then, the biggest risk to the banks was from the sovereign. Today, perhaps the biggest risk to the sovereign comes from the banks. Causality has reversed.” “The reason could be that in UK banks’ assets are 492% of GDP. That is about 5 times the size of the UK economy! (John Lanchester in LRB 18th July, 2013) That is why these banks will remain too big to fail or jail.

Despite a blizzard of laws and international treaties economic crimes continue to trump ethics.

The US Attorney General Eric Holder brazenly admitted his helplessness in March 2013 to the US Senate Judiciary Committee. He was talking about banks too big to jail. "The size of some of these institutions becomes so large that it does become difficult for us to prosecute them... if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy." Such a shield is willingly given to their executives too. This is the whine of a helpless official, whose bread may be coming from his Government, but who knows which side to butter. Money, for the moment, lords it over morals and scruples. It has been so for quite a few centuries.

Shakespeare spoke for all times when he wrote these lines in King Lear:      

Through tattered clothes great vices do appear;
Robes and furred gowns hide all. Plate sin with gold,
And the strong lance of justice hurtless breaks.
Arm it in rags, a pigmy’s straw does pierce it. “

I hope that with increasing Commissions of Enquiries and militant journalism and activism years of greed are numbered. 

US regulator sues 16 banks for alleged Libor rigging  - of March 14, 2014