HSBC's $1.9 Billion Money Laundering Fine And the Somalian Cost Of Bank Regulation
There's an interesting little example of the way in which well meaning regulation has significant costs here. You'll recall that HSBC was hit with $1.9 billion in fines over allegations about money laundering? You'll also have noted that no one ever actually did prove that it shifted around money for Mexican drug dealers and all the rest. Rather, that it's internal documentation processes were inadequate to show that it had not been doing so. It was not a $1.9 billion fine for laundering money: it was a $1.9 billion fine for not following the regulations about how to monitor and or prevent money laundering.
In May, Barclays announced it would terminate banking services for 250 money transfer companies amid fears over money laundering and terrorist funding.
Although about 25 money transfer agencies will still be able to bank with Barclays, none facilitates payments to Somalia, a country particularly dependent on overseas remittances.
So, why is it that they are doing this?
A number of the world's largest banks have pulled back on operations in profitable emerging markets as international anti-money laundering rules tighten.
Barclays' decision follows a similar action by HSBC in the wake of its record $1.9bn settlement with US authorities over money-laundering allegations.
So there we have it.
I'm sure we all agree that we'd rather not have money laundering going on. And I'm sure we all also agree that stopping the drugs barons from cycling their money through the banking system is a good idea. Yet I think we'd all also agree that having a banking system that can get remittances from emigrants into one of the poorest countries in the world, Somalia, is also a good idea. Yet what we actually have is a conflict between these desirable goals. The rules and regulations we've imposed to stop the drug money laundering mean that it's not worth providing the service to Somalia. The costs of running the regulatory system are simply too high. As one UK commentator manages to entirely missthe point:
I'll be blunt. I don't believe them. If they were worried about money laundering Barclays would pull out of Cayman, the BVI, Jersey and other locations where tax evasion and high level avoidance is rampant – all of it only possible because of the presence of the world's major banks and the availability of corporate and trust secrecy that facilitates the movement of billions and even trillions of funds behind a veil of respectability, all in the pursuit of greed and excess.
But instead Barclays is pulling out of a sector where the average transaction is a few hundred pounds at most and people are literally dependent for their economic survival on such payments being made.
It's not so much that they are worried about money laundering: it's that they're worried about being fined $1.9 billion for not following the bureaucratic rules against money laundering. Those rules imposing a basic per unit cost upon each and every bank transfer. Which means, in turn, that it will be the small bank transfers that cannot cover the costs of performing the necessary bureaucratic regulatory processes.
Essentially, we can have a banking system with the current rules and regulations about money laundering or we can have a banking system that can handle remittances into Somalia. But what we cannot have is both: for the regulations are too expensive to allow the sending of small remittances into Somalia. Myself I would argue that we should have less bureaucracy and regulation and more money flowing into Somalia: but I agree absolutely that people can differ with me on that. My real and basic point here is that regulation imposes real world costs. The more regulation we have, the more expensive it is to obey such regulations, the more of other possibly desirable things we cannot do. Stopping Mexican drug barons laundering their money also means that we cannot send money to the starving in Somalia. Not quite the trade off I would recommend but it is the one the world has currently made.