Habib Bank Expelled From New York

9 09 2017

The case of the Bank of Credit and Commerce International (BCCI), which had fairy tale beginnings and patronage from the ruler of Dubai, is an historic example of a global private Pakistani bank that was shut down because of large-scale financial crime and money laundering. BCCI gave other lenders “bad vibes” and quickly acquired the nickname “the bank of Crooks and Criminals”. The closure of BCCI gave rise to the most costly and extravagant litigation in a generation. Indeed, as the late Lord Bingham discerned, investigating BCCI’s global malpractice “if a possible task, is one which would take many years to carry out”. Now the story seems to be repeating itself with Habib Bank – Pakistan’s largest bank headquartered in Karachi with $24bn worth of balance sheet assets and $1bn in annual revenue – which has been fined $225m because its New York branch failed to comply with New York laws and regulations designed to combat money laundering, terrorist financing, and other illicit financial transactions. Compliance failures were said to have “opened the door” to financing Saudi sponsored terrorism. Transactions were “batch waived” and management was unable to explain their actions. The news comes just days after the announcement that the Department of Financial Services (DFS) is seeking to enforce a civil monetary penalty of $629.625m on the bank. These enforcement actions by the DFS are a grim reminder of the poor culture plaguing banks and misconduct besetting financial institutions. DFS said it would not let the bank “sneak out” of the US without due accountability. In terms of culpability, the failures can be classified as “corporate integrity-related regulatory breach” and/or “imputed breach” events.

Because of significant weaknesses in the its risk management capabilities, the branch received the lowest possible rating of “5” in the latest compliance assessment conducted in 2016. The case for using conduct costs as a framework for analysing in the banking sector in Pakistan has already been articulated on this blog. If anything, the fines imposed by DFS certainly make Habib Bank the foremost – i.e. number “1” –financial institution for poor conduct in Pakistan itself. But of course it is equally true that Habib Bank’s delinquencies are surpassed by the toxic level of failings connected to the £264bn in conduct costs incurred by the world’s foremost international banks including Bank of America, JPMorgan Chase, Morgan Stanley, Lloyds Banking Group, Barclays, HSBC and so forth. As Lord King aptly puts it a decade after the global financial crisis: “Very smart people thought it was fun and completely acceptable to exploit less smart people.” The scale of poor conduct in the New York branch, which processed banking transactions worth a total of $287bn in 2015, raises serious questions about the state of affairs in the banking sector in Pakistan itself where corruption is widespread and regulation is diluted in comparison to the West. Read the rest of this entry »





Supreme Court: Equity’s Darling and Guidance on Enforceability of Trusts where the Institution is Unknown

3 09 2017

Akers & Ors (Respondents) v Samba Financial Group (Appellant) [2017] UKSC 6 (1 February 2017)

In this appeal, Lords Neuberger, Mance, Sumption, Toulson and Collins unanimously held that a trust could be created, exist and be enforceable in relation to assets located in a jurisdiction where the law did not recognise trusts in any form. Many of the issues in earlier proceedings fell away. But nonetheless, because of the shifting focus of submissions, Lord Mance prefaced his lead judgment by describing the issues as “novel and difficult”. Proceedings were brought against Samba Financial Group (Samba) by Saad Investments Co Ltd (SICL) and its Joint Official Liquidators (the liquidators) who were appointed in winding up proceedings in the Cayman Islands which were subsequently recognised in England as a foreign main insolvency proceeding under the Cross-Border Insolvency Regulations 2006. Samba sought to stay the claim on the ground that rather than England “there exists another forum [i.e. Saudi Arabia] which is clearly and distinctly more appropriate”. Over the course of time, the ground morphed into the argument that SICL’s claim had no prospect of success and the case proceeded in the Supreme Court on that basis. Similarly, the appeal was presented to the justices on certain assumed facts. Shares valued at approximately $318m in various Saudi Arabian banks were held by Mr Al-Sanea (AS) on trust for SICL which went into liquidation by virtue of which Mr Stephen John Akers came to be one of its liquidators.

AS was the registered owner of the shares in the Saudi Arabian Securities Depositary Centre and SICL claimed that he had agreed to hold these Saudi Arabian shares at all material times on trust. Six weeks after the liquidation, in a series of six transactions, the shares were transferred by AS to Samba to discharge personal liabilities he owed them. Two other assumptions were made. Firstly, that Cayman Islands law governed the trusts. And secondly that the law of Saudi Arabia, the “lex situs” of the shares, does not recognise the institution of trust or a division between legal and proprietary interests. Saudi Arabian law does, however, recognise the institution of amaana – a kind of bailment construable as a trust – but its precise effects remained unexplored in evidence. Relying on section 127 (avoidance of property dispositions, etc) of the Insolvency Act 1986, SICL and the liquidators argued that the transfers of shares were and are void as a result of the “disposition of the company’s property … made after the commencement of the winding up”. The English law doctrine of “equity’s darling” is missing from other jurisdictions where a transfer to a third party might override beneficiaries’ rights, possibly overlooking any equitable interest at all. Read the rest of this entry »





Conduct Costs on the Rise (2012-2016): No End in Sight

25 08 2017

The latest findings on misconduct in financial services reveal an upward trend in conduct costs. During the five-year period 2012-2016, the world’s 20 leading banks have paid £264bn for bad behaviour. This represents an increase of 32pc on the period 2008-12. A worrying aspect of adverse bank behaviour is reflected in the uninhibited expansion of conduct cost provisioning. The key question, explains Chris Stears, relates to the average level at which these costs will settle. “We find ourselves wondering when, if ever, the level of conduct costs will start to decrease,” is how Roger McCormick puts it five years after publishing the first league table for international bank fines. These concerns can only be magnified by new developments such as the Royal Bank of Scotland’s recent $5.5bn settlement with the Federal Housing Finance Agency to resolve toxic mortgage claims in relation to the lender’s issuance and underwriting of approximately $32bn of residential mortgage-backed securities in America. Equally, the fact that the US Federal Deposit Insurance Corporation is suing major British banks for $400bn cannot possibly alleviate people’s worries or instil confidence in banking institutions. Brought on behalf of 39 rescued American banks, the US government’s claim in London relates to LIBOR “lowballing” and the defendants include household names such as such as Barclays, Lloyds Banking Group and Royal Bank of Scotland. Even partial success in a claim of this nature could radically enhance the present level of conduct costs.

But still all this is only the gentle way in punishment. Conversely, the Qatari crisis that has hit Barclays may well trigger the beginning of the end for high-powered management personnel who have thus far generally enjoyed immunity from criminal justice. Ongoing fraud investigations against Barclays and John Varley (former CEO), Roger Jenkins (former Executive Chairman) and Richard Boath (former European Head) must have sent shockwaves through out the banking industry. The trio’s trial will undoubtedly be a closely watched and studied event and if they are convicted the game-changing Qatari fiasco shall define things for future times. The US authorities have also charged two managers from Société Générale, for participation in a scheme to rig US dollar LIBOR. Danielle Sindzingre and Muriel Bescond boosted Société Générale’s creditworthiness by submitting false information in relation to the rates at which the bank would be able to borrow money. As we already know the “numbers tell a story” and since the risks are very great “in the case of bank behaviour, they speak louder than words, and they tell a big, and scandalous, story.” Read the rest of this entry »





Andrew Bailey on the Death of LIBOR

2 08 2017

The ailing LIBOR benchmark, underpinning $500-$800 trillion worth of financial contracts, has been in a state of malaise for many years. Despite the efforts of regulators to revive the sick scandal-ridden benchmark, which suffered from a series of problems related to cheating and misreporting, it is unsurprising that its slow death will finally come in about four years’ time. As the Chief Executive of the FCA Andrew Bailey recently explained the funeral is set for 2021. But some clearly want LIBOR to live longer. Bailey called LIBOR “a public good” but questioned its current usefulness. Among other things, LIBOR related misconduct resulted in civil claims and fines of £9 billion. And, of course, in the criminal context it resulted in “clustered criminality” of which convicted LIBOR rigger Tom Hayes is a prime example. Clustered criminality, which only reflects a very small part of the ills affecting financial services, is when there “is at least strong suspicion that a crime has been committed and although the culprits may not be immediately clear it seems likely that more than one person was involved.” A succinct account of bankers lying, cheating and colluding to rig LIBOR is found in The Fix where Liam Vaughan and Gavin Finch expose the ills gripping the financial world. Hayes, who operated as “Tommy Chocolate” in the midst of the financial crisis, worked in a culture where “your performance metric” is all about “the edge” and making “a bit more money” because that is “how you are judged”.

In The Spider Network, David Enrich tells the “wild story” of Hayes – who he dubs “a maths genius” – and the backstabbing banking mafia which operated a thoroughly crooked financial system. Breaking the silence in an exclusive interview with The Sunday Times, Hayes’s wife Sarah Tighe vowed to “never stop fighting for my autistic husband, the LIBOR fall guy”. Hayes, who achieved notoriety by miraculously dodging extradition to the US, was jailed for 14 years for fraud but his sentence was reduced to 11 years. Tighe is fighting for her husband’s release and said that she “went apeshit” when officials tried to seize her assets as well. Her morale will undoubtedly be strengthened by the news that former Rabobank traders Anthony Allen and Anthony Conti, who are both British and were convicted at first instance for rigging LIBOR, have had their convictions overturned by the US Court of Appeals for the Second Circuit in New York which found that constitutional rights against self-incrimination had been breached. Tom and Sarah will probably also find solace in the fact that the cycle of cheating was so extreme that even the Bank of England is now implicated in LIBOR manipulation. Read the rest of this entry »





Supreme Court on the ‘Houdini Taxpayer’

24 04 2016

UBS AG & Deutsche Bank v Revenue and Customs [2016] UKSC 13 (9 March 2016)

As infamously explained by jailed fraudster Tom Hayes, UBS must be credited with issuing a “handbook” on rigging LIBOR. Doubling Hayes up, in the ongoing LIBOR trial, Jonathan Mathew, one of five charged Barclays traders, says that he was merely following orders and just did what his boss taught/told him to do. The five men say everyone in the big banks “knew LIBOR was rigged”. As seen in an earlier post, along with Barclays traders, Deutsche Bank traders are facing criminal charges for EURIBOR manipulation and proceedings are ongoing in the case of R v Christian Bittar & Ors – first appearances were made at Westminster Magistrates’ Court on 11 January 2016 and a mention hearing was held on 18 March 2016. Former Deutsche trader Martyn Dodgson has also been convicted for insider trading in Operation Tabernula. In the instant case, echoing Templeman LJ in W T Ramsay Ltd v Inland Revenue Comrs [1979] 1 WLR 974, Lord Reed described UBS and Deutsche Bank’s behaviour as “the most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax.” The banks, which Lord King calls “the Achilles heel of capitalism”, may be disappointed with the Supreme Court’s ruling but most people will only be too delighted that top executives should become acquainted with some degree of retributive justice. The dry issue of tax is a hot political topic these days and the Panama Papers (see here) culminated in calls for the prime minister to resign for being a hypocrite.

Though this post is about the Supreme Court’s judgment, I use the opportunity to discursively expose other important tax issues reported in the media. Of course, Deutsche Bank announced last October that it would axe 9,000 full-time jobs and it has just recent lost its global position as a top-three investment bank. Research from Coalition, that ranks global investment banks by total revenue from fees and trading, shows that Citigroup and Bank of America are ahead of Deutsche Bank. JPMorgan Chase and Goldman Sachs retained their positions in first and second place respectively. Tim Wallace writes in today’s The Sunday Telegraph that once a cash cow, investment banking is now is serious crisis and jobs and pay across the sector has declined. It is a vicious cycle and the following insightful analogy is invoked “shrinking an investment bank is hard. It is like unravelling a jumper – once you start pulling on the thread it is hard to stop … then all of a sudden, you haven’t got a jumper at all.” Read the rest of this entry »





Catalyst for Change: Towards a Model of Conduct Costs in Pakistan

24 04 2016

Reposted from the Conduct Costs Pakistan Blog which I have recently started. As measured by the CCP Research Foundation, in the aftermath of the collapse of Lehman Brothers seven years ago, global “conduct costs” are approaching stratospheric levels and are presently estimated to be $300 billion. But none of the data reflected in the final sum can be traced to Pakistan – a market economy whose legal system closely resembles the English legal system, despite the politically retrograde Islamisation of the 1980s – in clear and unambiguous terms. This blog is written with the ambition of articulating a conduct costs’ model in Pakistan, a developing country which is in need of such analysis so that its 192 million people are put in a position to make informed choices about banking and financial services.

In constitutional terms, a sound basis for the study of conduct costs can be found in Articles 37 and 38 of the Constitution of Pakistan 1973. Laid down in Part II: Fundamental Rights and Principles of Policy, Chapter 2: Principles of Policy of the Constitution, Article 37 requires the state to promote social justice and Article 38 imposes on the state a duty to promote the people’s social and economic well-being. On an alternative level, in The End of Alchemy, Professor Mervyn King relies on all his experience as a central banker to explain the wider dynamics of the global economy. He invites us to embrace the underlying theoretical argument that banks are “the Achilles heel of capitalism”. This attractive proposition is as advantageous a place to begin a study of the banks in Pakistan as it is in the west. Read the rest of this entry »





King and Country: Reflections on the Costs of Market Misconduct

1 04 2016

Read as updated SSRN paper with reference to the Panama Papers. Because of the Budget 2016, the chancellor has been accused of “looking more like Gordon Brown as a purveyor of gimmicks.” In difficult times when calls for his scalp over the row regarding the budget seemed to have eclipsed everything else, the rare bit of good news for George Osborne is that he can use the opportunity provided by the threat of Brexit – “a leap in the dark” which may cost the UK £100 billion or 5 per cent of GDP and 950,000 jobs by 2020 – to camouflage and obfuscate the real problems of conduct in the world of economics and finance. On the other hand, in an important interview with Charles Moore the former Bank of England governor Mervyn King showed hallmark signs of euroscepticism and said the people need to make up their own minds about the upcoming referendum. King also warned that lenders have not stopped taking excessive risks with savers’ money and the result is “bankers have not learnt the lessons of the Great Crash”. Unsurprisingly, in his somewhat controversial new book The End of Alchemy he makes the case against financial sorcery by arguing that it must be squeezed out of the world’s banking system. Perhaps, such failings are amplified further because “financial crises are a fact of life” and we are “moving into a rerun of the credit crunch”. Indeed, Lord King calls banks “the Achilles heel of capitalism.”

Below I sketch important/emerging issues in the intersecting themes of economics, law and misconduct as seen in the media, especially through the lens of “conduct costs” – some other themes are also explored. Mentioning Walter Bagehot and his classic text Lombard Street, which argued that the BoE should provide short-term financial support in times of crisis, King advises us that the old “lender of last resort” model (LOLR) is in need of revision because “banking has changed almost out of recognition since Bagehot’s time.” The former governor argues that the time has come to replace LOLR with the pawnbroker for all seasons (PFAS) system. For him, it is time for financial institutions to drop LOLR and embrace PFAS and be prepared to advance funds to just about anyone who has sufficient collateral. “The essential problem with the traditional LOLR,” argues King “is that in the presence of alchemy, the only way to provide sufficient liquidity in a crisis is to lend against bad collateral – at inadequate haircuts and low or zero penalty rates.” Read the rest of this entry »