Bank regulators sharpen claws

HSBC's investigation by the US Senate is the latest in a string of regulatory actions towards international lenders since the global financial crisis began - one which UAE banks can scarce afford to ignore.

HSBC Middle East, the bank's regional affiliate, came in for particular criticism because it did not always follow policies directed at a group level. Simon Dawson/Bloomberg

The scale of the US Senate's investigation of HSBC is staggering.

Some 1.4 million documents were examined, including bank records, correspondence, emails, legal pleadings and problematic transactions worth a total of US$19.7 billion (Dh72.35bn), not far off the profits of $22bn the British bank generated last year.

The inquiry touches almost every continent with concerns raised about dealings in Miami, Mexico, the Middle East, Sudan and North Korea.

HSBC Middle East, the bank's regional affiliate, came in for particular criticism because it did not always follow policies directed at a group level - leaving it exposed to criticism over its dealings with Iran.

The US Senate selected HSBC as a "case study" because of its lax internal controls, its "weak" anti-money laundering programmes and because it operates in higher-risk jurisdictions including Asia, Africa and the Middle East.

The scale of the Senate's investigation and the revelations that sprang from it may seem unprecedented but it is just the latest banking scandal to rock the world of finance.

The global financial crisis, which had its beginnings in 2008, has been punctuated by a succession of major incidents involving some of the biggest banks in the world.

It has seen the collapse of the investment banks Lehman Brothers and Bear Sterns, the nationalisations of Northern Rock, Lloyds Banking Group and Royal Bank of Scotland in the United Kingdom, and rogue traders unearthed at France's Société Générale and Switzerland's UBS.

The result has been a near-complete erosion of trust in banking.

The latest major scandal, revealed last month, related to the fixing of London interbank offered rates (Libor), and has had a similarly deleterious effect.

The Bank of England (BoE) said it had been compelled to put pressure on Bob Diamond, who resigned as Barclays' chief executive earlier this month, because the company displayed a sense of denial about the magnitude of the scandal. "The Barclays board ... was deeply reluctant to face up to the concerns," the BoE governor Mervyn King said before a committee of British politicians yesterday.

"It became clear to me that they hadn't really taken on board the loss of confidence."

Policymakers and central banks are sharpening their claws in an effort to force a change in the culture at banks at a time when bankers themselves are capable of inflicting huge losses on institutions, with several self-styled "Masters of the Universe" exposing their rather bumbling missteps this year,

Trading losses incurred by JPMorgan's chief investment office on account of Bruno Iksil, the so-called "London Whale", left $4.4bn in losses for the second quarter after the trades were unwound, the bank revealed last week.

But banks in the Arabian Gulf can not afford to bury their heads in the sand while regulators act overseas, lawyers said.

The region's lenders were potentially at risk of similar regulatory probes because of the diverse and interconnected nature of their customers, said Lisa Kelaart-Courtney, the head of compliance at the law firm Clyde & Co.

"The business world doesn't operate in isolation anymore," she said. "Banks in this region ... need to take a proactive approach because the regulators will watch as well."

Noor Islamic Bank revealed in February it had been forced to cease business dealings with two Iranian lenders in December as a result of US sanctions on the country's financial sector. The Dubai bank said its exposure came via the UAE's clearing and settlement systems rather than its client relationships.

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