Drug Money: One Way to Keep the Too-Big-to-Fail Banks in Business
by Ramtanu Maitra on 11 Aug 2012 3 Comments

On July 17, David Bagley, who had been HSBC’s head of group compliance since 2002, resigned from his job in front of a US Senate subcommittee after it emerged the bank had exposed the United States to billions of dollars worth of money laundering, drug trafficking and terrorist financing. The US Homeland Security and Governmental Affairs subcommittee report claims a “pervasively polluted” culture at HSBC led the bank to act as financier to clients seeking to route shadowy funds from the world’s most dangerous and secretive corners.


The British paper The Independent reported that Bagley, who had had a 20-year career with the bank and is based in London, said: “Despite the best efforts and intentions of many dedicated professionals, HSBC has fallen short of our own expectations and the expectations of our regulators.”


Now that it has become public knowledge that HSBC, long known to some observers as a quintessential drug bank, was laundering money for the murderous Mexican Sinaloa drug cartel, the bank cannot afford to keep Bagley any longer. A veteran in this business, HSBC is aware that such an expose is an occupational hazard. The way to deal with it is to sacrifice one or two top officers like Bagley, pay a slap-on-the-wrist fine, and then get back to business again. The money is too big, and the HSBC is too big a bank to fail for lack of real money.


In his final stance on behalf of the drug money ban, Bagley said a few things. In a written submission to the subcommittee, he said HSBC was in the process of “shedding the historical compliance model that the bank has outgrown,” whatever that means. He also revealed that the bank is to close 20,000 accounts in the Cayman Islands as result of the money laundering investigation. Bagley was told by the subcommittee that foreign HSBC banks avoided safeguards designed to block transactions involving terrorists, drug lords, and rogue regimes, while it also ignored links to terrorists, providing services to risky banks in Saudi Arabia and Bangladesh.


HSBC: The old drug bank in the news again


“The culture at HSBC was pervasively polluted for a long time,” said Senator Carl Levin, chairman of the US Senate Permanent Subcommittee on Investigations, a congressional watchdog panel. The subcommittee pointed out that the US arm of HSBC (HBUS) treated HSBC Bank Mexico, which transported $7 billion (£4.5 billion) in cash in armored vehicles to it during 2007-2008, as a “low risk” client. In another case examined by the subcommittee, two HSBC affiliates sent nearly 25,000 transactions involving $19.4 billion (£12 billion) over seven years without disclosing their links to Iran.


The bank was also found to be clearing suspicious bulk travelers’ checks, including $290 million in “obviously suspicious” US travelers’ checks for a Japanese bank, benefiting Russians who claimed to be in the used car business. These are most likely penny ante revelations, deliberately put out to keep the level of fine on this too-big-to-fail bank at a minimum.


How did HSBC get in bed with the Mexican Sinaloa cartel? Well, therein lays a tale. No bank has been more closely connected with Mexican money laundering than Wachovia. Founded in 1879, Wachovia became the largest bank by assets in the southeastern United States by 1900. By 2008, Wachovia was the sixth-largest US lender, and it faced $26 billion in losses from subprime mortgage loans. That cost Wachovia Chief Executive Officer Kennedy Thompson his job in June 2008. Six months later, San Francisco-based Wells Fargo, which dates from 1852, bought Wachovia for $12.7 billion, becoming the fourth-largest bank in the United States.


As Wachovia’s balance sheet was bleeding, the US Justice Department was getting close to its drug money laundering venture. After a 22-month investigation, the Justice Department on March 12 charged Wachovia with violating the Bank Secrecy Act by failing to run an effective anti-money-laundering program. Five days later, Wells Fargo promised in a Miami federal courtroom to revamp its detection systems. Wachovia’s new owner paid $160 million in fines and penalties, less than 2 percent of its $12.3 billion profit in 2009.


Some observers point out that for laundering as much $378 billion over the years for the Sinaloa cartel, the $160 million fine ranks as a very minor business expense.


Once Wachovia stepped aside from the Mexican scene, in stepped HSBC. Bloomberg issued a report on June 29, 2010, stating that three banks — Wells Fargo, HSBC and Bank of America — were busted when a DC-9 carrying 5.7 tons cocaine was found in Mexico. According to the report, “This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers.”


The report also said that it is not just Wells Fargo, either. What is more astounding is the lack of prosecution in this obviously systemic problem. Miami-based American Express Bank International paid fines in both 1994 and 2007 after admitting it had failed to spot and report drug dealers laundering money through its accounts. Drug traffickers used accounts at Bank of America in Oklahoma City to buy three planes that carried 10 tons of cocaine, according to Mexican court filings.


Global Crime Syndicate


Every day, somewhere in this world, elected political officials are telling their citizens how important it is to keep the failing banks alive. The failing banks have made “mistakes,” the story goes, but to allow these banks to sink would cause “catastrophe.” Hence, all citizens, young and old, men, women and children should forego their right to a better future, embrace austerity and give the money to the banks that are too big to fail.


Volumes have been written about how the global criminal syndicate, otherwise known as the global financial system in its present form, used people’s money in the recent period the way the mafia uses illicitly-earned cash in gambling casinos. And how when the gamblers lost a whole lot, the world leaders moved in to take more public money to feed the casino-dwellers.


Almost every day one scam or the other, by one too-big-to-fail bank or the other, comes out in newspapers. The amount of money these banks gambled away and the amount of money governments of “developed” countries are pumping in to keep the gambling operations alive is inconceivable for ordinary individuals. They talk about trillions of dollars, making billions of dollars sound like small change.


But before the banks began gambling away people’s money, they were also engaged in laundering illegally-earned money deposited in cash in brown bags. As the looting process speeded up, the amount of illicit cash sloshing around increased multifold. For instance, the cash generated by the narcotics growers, controllers and petty peddlers are now generating almost a trillion dollars annually.


On July 16, the United Nations Office on Drugs and Crime (UNODC) reported that organized criminal network funds are turning over annually an estimated amount of $870 billion, more than six times the amount of official development assistance. These immense illicit funds are comparable to the equivalent of 1.5% of global gross domestic product, or 7% of the world’s exports of merchandise. With an estimated value of $320 billion a year, drug trafficking is the most lucrative form of business for criminals, according to the study.


Again, these are highly conservative figures. Some other observers point out that the opium/ heroin/ cocaine/ hashish itself produce a trillion-dollar stash. To get an idea of this money, recall that India, a nation of 1.2 billion people, in recent years developed a national economy of $1 trillion. The international narcotics industry produces that amount every year.


With that kind money at stake, lives become cheap. The Mexican drug cartels have killed more than 30,000 people in order to stash away their booty with Wells Fargo, HSBC, Bank of America and many other lesser banks. Because of the money-led gunpowder of this industry, few speak out against it. Why get on the wrong side of the bankers and those who kill?


Change the global financial architecture to stop the drug menace: Ivanov


One exception, however, is Viktor Ivanov, head of Russia’s Federal Drug Control Service (FDCS). Speaking to the Argentine Council of Foreign Relations in Buenos Aires on June 27, Ivanov called for joint action by the heads of state of nations affected by the dope plague to usher in a new financial system that would not promote drug money to keep the drug banks liquid and destroy millions of youths and others.


Ivanov stated: “There must be a change in the current global financial architecture: in particular, a separation between commercial and investment banks for the defense of credit operations against speculative ones, support for stability in the exchange rates of national currencies, and allocation of long-term targeted credits for infrastructure development. In particular, there needs to be a collective appeal from the heads of state of the countries that are suffering from the drug trade, on the necessity of introducing these measures.”


This new financial architecture, Ivanov declared, must replace the existing world monetary and financial system, which is the main cause for the spread of drug trafficking on a global scale, adding that the current system was built on the ruins of national economies, forcing them into backwardness by sucking out their resources and depriving them of the right to sovereign economic development.


In Buenos Aires, he said: “These [world drug] centers are the origin of narco-money, which is an inalienable part of the current system and generates the inevitable world economic and financial crises, preventing the world from adopting a new financial architecture.”


Last November, speaking at a conference hosted by the East-West Institute in cooperation with the Center for Strategic and International Studies in Washington, DC, Ivanov discussed the global drug trade and the key role of poppy production in Afghanistan with a diverse audience representing numerous US federal agencies, uniformed and civilian military officials, civil society, industry and diplomatic missions. He pointed out that the global drug trade is closely tied to the world financial system, where drug money represents “at least half” of global criminal flows. These funds, he said, in some cases provide much-needed liquidity to the financial system at a time of crisis. “In order to develop adequate solutions, we need to have a better picture of global drug flows,” Ivanov said. He added, “Two obvious drug flows are Latin American cocaine and Afghan heroin.”


Ivanov was fully aware that this huge drug money stash, produced year after year, and on which many of the too-big-to-fail banks depend, will not vanish as a result of regulatory measures or slap-on-the-wrist fines. That is why, in Buenos Aires, he addressed the larger issue, stating that this criminal syndicate can be put to bed only when a change in the current global financial architecture - in particular, a separation between commercial and investment banks for the defense of credit operations against speculative ones - is instituted.


He described a three-tiered program by which nations must reclaim this right to the sovereign development of the state as follows:

“The first level is the creation of the infrastructure needed for organizing advanced agriculture, including the formation of stable markets, a low-interest credit system for peasants, technical and technology support for agriculture (scientific and industrial seed-farming, fertilizers, and agricultural machine-building), a system of teaching and training for agronomists and other agriculture professionals, as well as tough protectionist measures to defend peasants who are growing legal crops.


“The second level is the creation of conditions for employment diversification, in order to reduce the portion of families whose welfare directly depends on succeeding in agriculture; in particular, this means forming a national high-technology industrial sector into which the population can be drawn. An example is Malaysia, which has turned from a backward agrarian country into one of the leading high-technology countries in a few decades.


“The third level is the sovereign development of the state, endowed with financial and credit independence. Nations must have the right to sovereign development. The existing world monetary and financial system, which was built on the ruins of national economies and by sucking their resources, is the main reason for the spread of drug trafficking on a world scale.”


The author is South Asian Analyst at Executive Intelligence Review

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