Sunday, 6 August 2017

The “Global Laundromat” Investigation Turns its Focus onto RBS

In March, here in Financial Regulation Matters, we looked at the developing story of a massive investigation into the laundering of Russian funds by a number of famous financial institutions, including HSBC, Lloyds, Barclays and a host of other institutions. The massive scheme, which runs into the tens of billions of dollars, was brought to the public’s attention in March and detailed a scheme enveloping countries from all over the world, with the obvious consequences being financial institutions coming in for regulatory scrutiny and even (potentially) criminal sanctions, especially with regards to the ongoing situation in the U.S. with the Administration’s alleged connection to Russian officials. However, in this post we shall focus on the most recent development which looks at the role RBS played in the laundering system, with the news coming at a very inopportune time in relation to the bank’s reporting of a £939 million profit for the first 6 months of 2017.

The week began well for RBS, with the bank announcing the £939 million profit for the first 6 months of 2017, a result which led the embattled Chief Executive – Ross McEwan – to announce that ‘the government is getting a much better bank… the core of the bank is delivering’. However, that news representing quite an outlier, because analysts firmly believe that the recent $5.5 billion settlement the bank reached with Federal Housing Finance Agency (the first of two massive penalties) will see the bank post its tenth consecutive yearly loss, whilst the bank confirmed that it has chosen Amsterdam to be its European base post-Brexit. Yet, whilst the Department of Justice’s (DoJ) penalty that is forthcoming is likely to have a hugely negative effect on RBS’s position, the focus of the globalised money-laundering investigation is perhaps the biggest concern for the bank, as the reputational capital that will be lost could be extensive, especially when we consider that RBS does not have much reputational capital to lose anyway.

It was reported on Friday that the Financial Conduct Authority (FCA) had initiated its investigation into the bank’s alleged ‘processing of hundreds of millions of pounds for a Russian money laundering scheme’. We know about the money laundering scheme already, having looked at HSBC’s alleged involvement, but the confirmed involvement of RBS would be particularly damaging as it would represent the latest in a long line of money-laundering charges aimed at the bank. Whilst it is very likely that RBS will be found to have been involved, purely based on the sheer size of the operation and the involvement of 732 banks in 96 countries, the history of the bank’s inability to comply with Anti-money laundering rules (AML) is staggering. In 2002 the Financial Services Authority (FSA) fined RBS £750,000 for failing to implement and act upon adequate ‘Know-Your-Customer’ (KYC) rules. In 2010, the FSA again fined RBS a then-record £5.6 million for processing foreign payments that were potentially in contravention of the HM Treasury sanctions list. In 2012, the FSA then fined Coutts & Co. bank, owned by RBS, a record £8.75 million for precisely the same offence; more recently, the bank has also been fined HK$7m by Hong Kong’s banking regulator for the same offences, mostly related to the bank’s connection to the 1MDB Malaysian political scandal. Whilst a more positive person may be of the opinion that these stories are not connected, it is hard to conclude that the bank has learned from its mistake and were not part of the impending Russian money laundering scandal; the bank has too much form for breaching AML rules.


Ultimately, some of the conclusions that we have arrived at here in Financial Regulation Matters concerning RBS remain just as true in light of these recent developments; it is difficult to see how RBS will make it back to private hands like its competitor Lloyds has recently. The continuation of penalties and investigations makes clear that the culture of the bank was rancid, and that cleaning it to ensure the firm’s future is nothing short of a gargantuan task. Billion-dollar fines, billion-pound settlements with investors, accusations of being part of a massive and politically-incendiary money-laundering network all accumulate into a negative outlook. When we combine this with the suggestion that the bank will report its tenth consecutive yearly loss, it is surprising that the British government is not considering drastic action. The question for the government and the British taxpayer is how long will RBS be allowed to continue? How long will it be acceptable for the British taxpayer to hold on to this loss-making entity? Arguably, in a perfect world, RBS would have already been dismantled and sold for the highest possible price to avoid further losses for the taxpayer, but the loss of RBS from the financial landscape, so soon after the Financial Crisis, would have dramatic effects on the confidence of the marketplace. Ultimately, ‘too-big-to-fail’ is in full effect every time RBS reports another one of its failures.

Keywords - "money laundering", "anti money laundering", "fraud", "politics", "RBS", "Russia", "#finregmatters"

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