The UK’s top financial regulator, the Financial Conduct Authority (FCA), recently promised a crackdown on money laundering and financial crime in response to the Panama Papers. The huge data leak revealed that several global banks, including HSBC, have moved money offshore with the help of secretive Panamanian firm Mossack Fonseca, prompting regulators in several countries to take action against tax avoidance and money laundering.
But the FCA now faces questions about its ability to maintain regulatory impartiality thanks to the presence on the board of Ruth Kelly, who worked at HSBC Global Asset Management between 2010 and 2015 as their Global Head of Client Strategy. Data from the Panama Papers that has been made available to the public by the ICIJ demonstrates that holdings HSBC Global Asset Management publicly claim to have acquired over the years have been invested in offshore shell companies named in Mossack Fonseca’s files.
Kelly served as a cabinet minister under Tony Blair, whose government famously championed light-touch financial regulation
The history section of HSBC Global Asset Management’s website tells readers that in 2004 they acquired the Bank of Bermuda. The ICIJ’s public database shows that the since-renamed HSBC Bank Bermuda either is or has been a shareholder in K.M. International Ltd, which it lists as an offshore entity. The website also lists one of its historic acquisitions as Trinkaus & Burkhardt, now named HSBC Trinkaus & Burkhardt, which the banking giant bought in 1992. The ICIJ database demonstrates that this subsidiary of HSBC is or has been the Master Client of three offshore entities: Sea Urchin Holdings Ltd, Walton Development Group Ltd, and HSBC Trinkaus & Burkhardt (International) S. A.
It is unclear from the ICIJ’s public data whether HSBC Bank Bermuda and HSBC Trinkaus & Burkhardt remain invested in these offshore entities today, or whether they were clients or shareholders of these companies while Ruth Kelly worked for HSBC Global Asset Management. Furthermore there is no suggestion that Kelly was personally involved in the arrangement of offshore entities as part of her job at HSBC.
Kelly served as a cabinet minister in Tony Blair’s government, which prior to the financial crash in 2008 famously championed the light-touch regulation of a “thriving and healthy banking sector”.
An FCA press officer, asked to clarify the role of the board, said that “there is not generally a discussion at board level about operational issues like [individual investigations]”, and that decisions of supervisory action on financial institutions are an executive rather than board concern. However, it was suggested that an executive board member may have recused themselves in a separate case in the past to avoid a potential conflict of interest, implying that a precedent could already exist for board members to declare a conflict and step away from a particular case.
Alex Cobham, the Director of Research at the Tax Justice Network, told the Leveller:
“If Ms Kelly were not to have made such a declaration, and this information was then made available to the chair, the implied breach of confidence would be such that it’s difficult to see how Ms Kelly could possibly continue in the role.”
There are already public concerns about financial and tax regulators’ ability to remain impartial due to recent scandals and regulatory failures.
The government tax collection agency HMRC’s initial position, that they would respond to the Panama Papers with an investigation, appears to have already crumbled as it is now considered highly unlikely that HMRC intends to prosecute any of the tax avoiders named in the leaked Mossack Fonseca documents. A tax investigation expert told the Financial Times that “prosecutions are costly and risky…HMRC’s first job is to collect money . . . it’s a very difficult decision for them to prosecute a taxpayer.” It was recently revealed that the head of HMRC, Edward Troup, was a partner in a City firm that acted for the offshore entity that David Cameron had shares in. Troup once publicly argued in a newspaper column that “taxation is legalized extortion”.
Meanwhile the FCA has been dogged by allegations that it has already colluded directly with HSBC on a $1.4bn credit card fraud case.
The FCA may have been receiving direct instructions from HSBC
The regulator recently launched an investigation into a large scale credit card fraud case involving a now-defunct bank and its owner – HFC and John Lewis Financial Services, which is a subsidiary of HSBC. HFC was acquired by HSBC in 2003. The case was brought before the Financial Services Authority (replaced by the FCA, founded in early 2013) by Nicholas Wilson, a lawyer whose firm represented HFC. Wilson discovered what appeared to be the illegal overcharging of customers on their debts, and was fired for reporting his firm to the Law Society. He has fought for over a decade to get the case investigated by financial regulators, despite the fact that the Office for Fair Trading had already ruled against the bank in 2010 based on Wilson’s evidence.
Wilson made a complaint against HSBC to the FSA in December 2012, which he told the Leveller was “completely ignored” (despite regular attempts to make contact) until a Freedom of Information request yielded a response from the FCA in April 2014 telling him that “more time was needed”. At that time Wilson discovered evidence that the FCA may have been receiving direct instructions from HSBC.
As reported by journalist Ian Fraser, the FCA’s reply to Wilson’s FOI request was reproduced verbatim by HSBC when Joel Benjamin, a financial justice campaigner from New Zealand, wrote to the bank to ask why it had failed to respond to Wilson’s allegations by taking any action. Fraser wrote: “the FCA’s response was identical to that of the bank, suggesting it had simply asked the bank how it should respond and had then cut and pasted the bank’s response into it own.”
“Certainly there’s a conflict of interest in the FCA employing Ruth Kelly, knowing that there was this outstanding fraud investigation.”
Finally, in January 2016, the FCA was forced to write Wilson an apology for their three years of evasiveness and failure, and this month held a meeting with Wilson and his lawyer in which he presented his evidence of the alleged fraud. Wilson is optimistic that the case can finally receive the scrutiny it deserves. “I want to move forward,” he told the Leveller. “As far as I’m concerned the complaint’s been dealt with. They’ve apologized, they’ve paid me compensation. I want to be positive, and get them on side. I want to be friends with them.”
But Wilson had previously voiced concerns on his blog that some recent appointments to the board of the FCA may contain conflicts of interest with HSBC, including Ruth Kelly’s. “I have to say that what [Kelly] did at HSBC had nothing to do with what I was doing, she would probably have known nothing about it,” Wilson said. “But certainly there’s a conflict of interest in the FCA employing her, knowing that there was this outstanding fraud investigation.”
Where HSBC has demonstrable financial and political connections across the British media, those outlets place the bank under almost no scrutiny concerning their fraud allegations
While Wilson believes that the FCA is now willing to genuinely tackle the issue, he remains wary of HSBC and has openly suspected on his blog that their modus operandi is to pull any strings they can. In February this year HSBC downgraded their provision for this fraud from $1bn to $0.4bn, and Wilson wrote at the time that he believed the FCA was “reassuring the bank that its liability will be limited, if they are found liable at all.”
HSBC is believed by some to both hold and utilize financial leverage over influential figures and institutions in order to keep several allegations of fraudulent activity worldwide under control. The bank came close to losing its license in the USA thanks to a $1.9bn fraud settlement in 2012 for laundering money on behalf of terrorists and drug cartels, with federal investigators accused of colluding with the bank.
And the Leveller reported in February that where HSBC has demonstrable financial and political connections all across the British media (including the BBC), those same outlets place the bank under either very mild or no scrutiny for major news stories concerning their fraud allegations. Wilson has stated his belief that this process has helped keep media pressure off the FCA to investigate his own case, and in response to coverage of the Panama Papers he tweeted that the “BBC report capital outflows from China. They don’t report most money goes through HSBC Hong Kong, a British bank.”
Alex Cobham stressed that the public should take care not to condemn financial regulators as necessarily guilty simply for recruiting from the industry:
“Now there may be good reasons to employ potentially conflicted individuals in areas of regulation – for example, there may be reasons for optimism about the impact of the ‘poacher turned gamekeeper’ approach of the UK government, in appointing to head HMRC a former tax adviser who has previously characterized tax as legalized extortion. Clearly however, there is at the very minimum a greater need for scrutiny in this case, and for appropriate action in response to specific conflicts.
In [regards to Ruth Kelly’s links to HSBC], the same general issues are present. Is there a value to having previously regulated actors join the regulator? Almost certainly. Does that, however, extend to currently regulated actors? Or to actors whose previously regulated activity is likely to come under scrutiny? These are much more difficult questions.”
If Ian Fraser’s observation is correct, that “it seems that HFC / HSBC and the Financial Conduct Authority have been caught red handed” on the question of direct collusion, then the FCA has sufficiently demonstrated form regarding its potential to be influenced by the bank, even without the presence of possibly conflicted board members.
When asked what he would recommend to the board of the FCA to satisfy the public’s growing interest in their transparency and impartiality, Cobham said: “I don’t see how any reasonable chair could respond to Ms Kelly’s declaration of a conflict in any way other than to thank her, and exclude her from all related processes.”
Image: Matt Buck