Scams: From reel to real

A near-universal recommendation in the wake of the Rs 114-billion Punjab National Bank (PNB) scam is the urgent need to privatise state-run banks. Nearly every commentator has brought out statistics, encompassing but not limited to non-performing assets, to claim that there is no bigger issue that plagues India’s banking sector than the hold that the government, and by extension, a prevaricating bureaucracy, has on most of its assets.

While privatisation in the Indian context may seem the need of the hour — if for no other reason than simply for greater vigilance — stories from other geographies can help us understand how banking as a sector has always been prone to systemic faults. This includes the financial crisis of 2008 that brought to the fore the term “too big to fail” for private banks where fraud could be detected but, arguably, not adequately contained for fear it would take down the broader economy.

A new Netflix documentary, Cartel Bank, goes deep into another such case of widespread oversight and intentional fraud at one of the world’s best known private banks, HSBC. The documentary details the lax regulation at the bank, which allowed it to be the funnel of money in desperate need of laundering. From drug monies to terror operations, HSBC was game to use its august branches to allow all comers to clean their ill-gotten wealth.

The documentary — which focuses on money from Mexican drug cartels — expertly builds up its case, with testimonies from drug officials, lawmakers, investigators, and most importantly, the whistleblower who brought the issue to light. Everett Stern, who joined the bank’s anti-money laundering division in Delaware, was the first to report that the bank was deliberately overlooking the source of funds that arrived at its branches. It was his testimony to the Central Intelligence Agency that resulted in the $1.9-billion fine slapped on the bank by federal prosecutors in 2012.

But Cartel Bank goes further. It includes snippets from the tense press conference at which the deferred prosecution agreement — official speak for a mild slap on the wrist — against HSBC was announced. One journalist pointed out that the $1.9-billion payout was a mere five weeks of profits for the bank. None of the HSBC top brass was indicted, let alone convicted, for the laundering. Only their bonuses were deferred, that too partially, in what to the Indian viewer is an instant reminder of how the big guns always manage to get away.

This howler led to comparisons between the strict laws against drug possession and selling on the one hand and the government-guaranteed freedom to profit from drug money on the other. But, there was a far more sinister element to the laundering. One of HSBC’s beneficiaries, the Sinaloa cartel, which laundered close to $100 million through the bank, is directly (one journalist in the documentary uses the word “unquestionably”) responsible for tens of thousands of deaths in Mexico.

The prosecutor’s defence of the fine — that prosecuting individuals at HSBC is likely to affect the stability of the financial system, still reeling from 2008 — was branded “too big to jail”, a damning upgrade of a phrase that captures the insular nature of the modern financial system. Meanwhile, the prosecutor Loretta Lynch rose to become US Attorney General under the Obama administration.

Cartel Bank is part of a six-part series called Dirty Money. Another episode looks at the Volkswagen diesel emission scandal, in which the German carmaker admitted in 2015 to using a “defeat device” to cheat diesel emission standards in the US. A defeat device alters the performance of the engine so that during testing in the lab, the vehicle emits far fewer pollutants than it does on the road.

The company’s response, however, was different to that in the HSBC case. Martin Winterkorn, the CEO, stepped down and a slew of senior managers were asked to leave. This, Dirty Money makes clear, stems from the difference in regulatory oversight in the two sectors, banking and environment. Volkswagen’s hand was forced by the Environment Protection Agency, the American environment regulator, which threatened to withhold approval of the company’s 2016 diesel models until it came clean on the defeat device.

And perhaps it is here that the series holds lessons for emerging markets such as India. The blanket call for privatisation heard in the aftermath of the PNB scam may not yield the desired results unless oversight in strengthened. It is generally acknowledged that India’s financial sector has robust safeguards, with institutions such as the Securities and Exchange Board of India and the Reserve Bank of India, having played a key role in establishing this ecosystem.

But the real test of such safeguards can only come during a crisis like PNB’s, and the response of the regulators will be keenly watched in this case. While investigation in the matter is still on, the bank has thus far pinned the blame on the particular branch that was involved in the collusion. Dirty Money reminds us that the whole truth can only emerge when all agencies — internal to the bank and external — play their part in detecting the full source of the malfeasance.

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