/ 10 August 2012

Call for ethics probe into UK banks

The bank’s high-performing shares slumped following talk of money laundering in Iran.
The bank’s high-performing shares slumped following talk of money laundering in Iran.

Labour MP John Mann, an outspoken member of the British House of Commons treasury select committee, has called for a government inquiry into money laundering and outlined fears that United States regulators have British banks in their sights as they try to shift business from London to New York.

The allegations against Standard Chartered, made on August 6 by the little-known New York state department of financial services, also prompted calls by investment advisory agency Pirc for discussion with top bankers about the industry's ethics.

One large shareholder in banking stocks warned that it was considering ditching all its investments in the sector in the wake of the London interbank offer rate (Libor) scandal and the money laundering allegations at HSBC, which were compounded by the allegations against Standard Chartered.

The damning criticism of Standard Chartered, which intends to contest the claims that it worked with Iran, is another blow to the reputation of  banking in the United Kingdom and is thought to be feeding prejudice in the US that the UK's regulators have allowed a "wild west" culture to become established.

Mann said he would request a government review into money laundering and "an increasing anti-British bias by US regulators and politicians aimed at shifting financial markets from London to New York".

Far-reaching investigation
"I have no truck whatsoever with British banks profiteering from Iran and Burma, nor with US banks profiteering from drug and illegal arms money or the private accounts of world dictators," Mann said. "The British Parliament should instigate an unbiased and far-reaching investigation into money laundering in Britain involving British banks and endangering the wellbeing of British interests and the British people."

The sharp fall in Standard Chartered shares demonstrated that the accusations were being taken seriously by investors, who last week were celebrating the 10th successive year of record profits at the bank that, although based in London, specialises in emerging markets.

"Shareholders should now be thinking about industry-wide engagement to sort out the reputational and ethical crisis that is engulfing the UK banking sector," said Pirc.

Standard Chartered's share price was hit particularly hard by fears that the hitherto top-rated management team might be forced out by the allegations and worries that the bank would be at risk of losing its licence in the US.

Banking analysts at Credit Suisse said licences had not been revoked for other banks for similar offences, but acknowledged: "The market is already concerned about litigation risk and regulatory issues in the sector, especially given recent events at Barclays and HSBC, so this does not help sentiment at a time when it is fragile."

Sanctions breaches
More details were being sought by investors and analysts, although the Credit Suisse analysts noted that Standard Chartered was not the first bank to encounter the wrath of US regulators over sanctions breaches.

Lloyds TSB was fined $350-million in September 2009 and Barclays $176-million in August 2010, according to Credit Suisse. Other banks, such as the Dutch ING group and Wall Street's JP Morgan, have also had to pay big penalties.

Gary Greenwood, a banking analyst at Shore Capital, thought it was unlikely Standard Chartered would lose its US licence. "A loss of its US banking licence would not only jeopardise part of this profit stream, but the associated reputational damage could also severely damage its operations within emerging markets … However, at this stage, we view this outcome as unlikely."

City analysts have been supporters of Standard Chartered shares throughout much of the financial crisis, which the bank survived without taxpayer bailouts.

Even so, Sandy Chen, at Cenkos Securities, who has recommended buying the shares for most of the past decade, said he was downgrading to sell. "We regard this as hugely damaging to its global franchise," he said. Mike Trippitt, an analyst at Oriel, cut his rating to "reduce" from "buy". He said: "The tone and language of the report is quite shocking, but it was equally a very firm rebuttal from Standard Chartered to say it was acting lawfully and measuring what it thinks was outside the rules."

There were also supporters. Ian Gordon, a banking analyst at Investec, described the US regulator's move as an "unexpected and ferocious attack". "Standard Chartered is not an ordinary bank. It has a proud reputation, a management team of high integrity and is known for its magnificent work with the charity Seeing is Believing. It is of grave concern to see its reputation sullied before the facts are known."

Said Greenwood: "As is par for the course in these situations, the spotlight will now fall on management, with the inevitable calls for heads to roll by politicians and the media alike. However, while not wishing to vindicate senior management in this issue, we believe removing it is not the answer as it may only exacerbate the situation.

"The management team now needs to focus all its efforts on mitigating potential reputational damage." – © Guardian News & Media 2012