Monthly Archives: January 2014

Why is banking still so scandal ridden?

A leopard with unchanged spots.

A leopard with unchanged spots.

A banker with a gambling and drinking problem. A man who ran a betting syndicate from his workplace for his colleagues. The same man who went to Las Vegas twice a year. Is this the kind of man you entrust with the keys to the vault. Literally, not figuratively. Would you put him in charge of access to the cash vault of a bank? Yes, if you are Ulster Bank. This man’s behaviour was so considered so un-noteworthy that he was allowed access to and to determine who else in the bank got access. Yet when half a million disappeared from the vault Ulster Bank attempted to implicate the person who blew the whistle on the theft. A criminal investigation only began after details of the theft emerged when the whistleblower sought compensation at an employment tribunal for his treatment.

Now all of this happened after the watershed in banking. After the point in 2008 when we were promised that in exchange for taxpayer support banks would change the way they do business. It was the summer of 2012 and you would think that what Ulster Bank would do next would be very clear. They would call the police, present them with the evidence gathered during the audit of their cash centre, and point them in the direction of the office of the chief suspect. Except none of that is clear

The bank haven´t said why they didn’t report the crime. They haven’t said if the suspect is still working in the sector. Nor have they said if any of the missing money has been repaid. That wouldn´t be unusual, as most large institutions usually try to spare their own blushes in these situations. But all this unfolded as Ulster Bank was in the throes of the public relations nightmare that was its IT meltdown. Senior managers were worried about adverse publicity and this may have led to an attempt to smear the whistleblower. They tried to implicate him on the slimmest of pretexts, though this injustice was subsequently put to rights.

Even these scant details suggest a pretty bizarre approach to Human Resource management not to mention Corporate Governance at Ulster Bank. An employee in a position of trust exhibiting a lot of signs that he was anything but trustworthy. A bank that responds to a criminal offence as a matter of reputation management.  How after everything that has happened could this be?

This all took place in 2012 when the Leopards were supposed to have washed off all their spots. We have all heard years of protestations before parliamentary committees, in print and on air about a change in culture. But have banks and bankers changed their ways. Maybe some have but a brief online trawl of banking scandals of the last eighteen months reveals a lot that has the whiff of 2008 about it.

Bank 5

First off there´s the LIBOR scandal. The manipulation of interbank lending rates that resulted in higher costs for pension funds, mutual funds, multinational corporations, and other bank clients that purchase and sell currencies. But individual traders in Barclays, Citigroup, Deutsche Bank, Goldman Sachs, JPMorgan Chase, UBS and nine other banks are now being investigated for allegedly making a fortune for themselves in commission and for their banks …. so what the heck.

The biggest banking fraud … no scratch that, the biggest of any kind of fraud in British history was only uncovered when the fraudster owned up. It might have been a bit too much to expect any of Kweku Adoboli’s managers to have checked his Facebook status. If they did they would have noticed that he had changed it to “Need a miracle”. But how on earth did internal audit at UBS not pick up on what he was doing on company time. His trading desk was cleared to a maximum of $100m. Yet at the height of his fraud in August of 2011 Adoboli exposed the bank $12billion of risk, but nobody at the bank knew until he emailed his bosses to tell them what he was up to. Where were the checks and balances? Or perhaps the more instructive question is – Why is it that we only ever hear about the Rogue Traders who lose money?

Kweku Adoboli.

Kweku Adoboli.

There will be an especially hot place in hell for the architect of this RBS policy if the allegations of a government adviser prove to be true. Lawrence Tomlinson accused the 82% state owned bank of pushing viable businesses into its turnaround arm — allegedly to strip assets and make a profit for the bank. Tomlinson said that he had heard many devastating stories of how RBS “has wrecked good businesses and the ruinous impact this has on the lives of the business owners.”

Strictly speaking Wells Fargo’s racist lending policy shouldn’t be included here. Mortgage brokers working with the bank had charged higher fees and rates to more than 30,000 Latino and African American borrowers across the US than they had to white borrowers who posed the same credit risk. The Department of Justice also found that Wells Fargo brokers also steered more than 4,000 minority borrowers into costlier subprime mortgages when white borrowers with similar credit risk profiles had received regular loans. They were running this appalling policy from 2004 to 2009 but in their settlement last year the bank only agreed to compensate those borrowers if they didn’t have to admit any wrongdoing. Honesty? Transparency? Acountability?

Juergen Fitschen the CEO of Deutshe Bank ended 2012 on a sour note with the news that he was being probed for “severe tax evasion”, also had to face the presumably unwelcome news at the end of 2013 that he was now being investigated for having allegedly provided false testimony in a different case. The German Finance Ministry is wrapping an investigation into Deutshe Bank’s handling of LIBOR and EURIBOR manipulation and has concluded according to Der Spiegel that Fitschen and his co-CEO have not done enough to investigate and clear up the scandal.

Juergen Fitschen and Anshu Jain, Co-CEO's of Deutshe Bank

Juergen Fitschen and Anshu Jain, Co-CEO’s of Deutshe Bank

Asian bankers have spoiled their reputation for inscrutability with up to 30 different banks in Japan, Singapore, South Korea and Hong Kong being investigated for alleged interbank lending rate manipulations similar to the LIBOR scandal.

The chairman of Mizuho bank in Japan resigned on St Stephen’s Day after it emerged that they had knowingly provided gangsters with a line of credit. Senior executives at the bank were aware of the loans for over two years, and, they only took action after the Japanese watchdog body started its investigation.

As of the end of December regulators in the UK were warning that 60,000 SME’s could have been deliberately screwed over by Barclays, HSBC, Lloyds Banking Group, National Australia Bank, and Royal Bank of Scotland. They were sold interest rate hedges in commercial loans since 2001 that in very many cases turned sour and cost them hundreds of thousands. Though the genesis of this is well before 2008 BBC’s Panorama showed how the way the scandal was being currently dealt with didn’t inspire confidence.

Banking giant JPMorgan Chase was forced to pay nearly a billion dollars in fines last year after its involvement in the “London whale” trading debacle. Traders overvalued a very complex portfolio to hide massive losses but the loss of $US6.2 billion in 2012 on the soured trading bets couldn’t be blamed on solely on Rogue Traders. The trading violations “demonstrated flaws permeating all levels of the firm: from portfolio level right up to senior management,” according to the Financial Conduct Authority.

Bank 7

10 major US banks have been forced to pay $8.5bn to homeowners they wrongfully foreclosed on. Citigroup, MetLife Bank, PNC Financial Services, Sovereign, SunTrust, U.S. Bank, Aurora, GMAC Mortgage, HSBC Finance Corp. and EMC Mortgage Corp all got off lightly though as the average award will be about $2,300

Toronto Dominion bank incorporated in Canada paid $52.5m in fines and approximately $600m in restitution to customers having failed to report suspicious activity on accounts used in a $1.2bn Ponzi Scheme. One of TD Banks regional managers is still defending himself against claims he lied to investors to support the scheme.

Banks are allowed to enter a property to secure their investment from weather damage or vadalism. However banks are not allowed to enter those homes while they are still occupied and let their sub-contractors remove personal belongings. Hundreds of Suits filed against most of America’s best known banks suggest this is something approaching a common practice

Regulators in Britain have set up a programme  to allow seven million customers to claim compensation relating to 23 million insurance policies sold by Card Protection Plan (CPP), which was fined £10.5 million in November 2012. “Customers were given misleading and unclear information about the policies so that they bought cover that either was not needed, or to cover risks that had been greatly exaggerated,” the Financial Conduct Authority said in a statement.

The Vatican Bank has always been egregious and not really representative of anything, but last years scandal has to be worth a mention here. Not least because it could have been the reason for the first papal resignation in 700 years.

Bank 9

And there I’ll stop even though there’s more than enough material to keep going. There are obvious problems with this kind of an excercise. For a start I haven´t included a baseline from prior to 2008 for the purposes of comparison. You could also say that increased detection could just as easily be evidence of more robust regulation as confirmation of bankers biting their thumbs at us. And it is not beyond the bounds of possibility that these cases could be entirely isolated in an otherwise pristine industry.

Except that last point is not the case. The chart below is taken from a recent Economist Intelligence Unit survey of banks. 67% of all banks have been affected by one or more of the issues listed. The worrying thing is that the most prevalent problems stem from within the banks – regulatory breaches, internal fraud, conflict of interest or market collusion.


One interpretation of this graph suggests that the thieves, hackers and fraudsters trying to rip off banks are not as great a risk to them as the scoundrels they employ and lavish bonuses on. The long and short of it is this – it is five years since these same people destroyed entire societies and then fell to their knees begging forgiveness. It is five years since all those “never again” promises were made. And here we are with every indication that bankers haven´t changed one iota.

The open question now is are they primed to make the same mistakes again?

Bank 1


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