Corruption: Foreign Banks need to re-think handling Africa's bad guys

Corruption: Foreign Banks need to re-think handling Africa's bad guys

Saturday, September 13, 2014 9:06 am

Kolawole Olaniyan

The financial crisis during 2008 and 2009, and its devastating effects on the socio-economic conditions of many people have made bankers the least trusted of all trades in Europe and North America. Statistics also show that sometimes unjustified salaries and bonuses are contributory factors to banking’s image problem.

This lack of trust and public confidence in the entire banking system is summed up by a UK banking regulator: “They [the banks] had a culture of gaming – and of gaming us.”

The best description of this state of affairs was provided by Mervyn King, former Bank of England governor: “I find it depressing that people who earn so much seem to think that it’s even more exciting to adjust the timing of it to get the benefit of the lower tax rate … knowing this must have an impact on the rest of society, when even now it is the rest of society that is suffering most from the consequences of the financial crisis.”

However, the other side of the story of a crisis of trust and public confidence, which is less understood, discussed or addressed, is that for much longer, failures by these banks and their home governments have caused and continue to contribute to untold damage to the economies of some of the poorest countries in the world, especially in Africa.

Every year an estimated $148 billion is siphoned off annually from African states and stashed in developed economies, according to Transparency International, a global non-profit group that tracks corruption. This figure may not be an exaggeration when it is con­sidered that in Nigeria alone, over $400bn is estimated to have been lost to high-level official corruption since independence in 1960.

Corruption and money laundering can have devastating consequences for national economies, democratic institutions, the rule of law, and enjoyment of human rights especially for a region like Africa.

Indeed, the twin problems of corruption and money laundering, and their ‘offspring’ – poverty – have more in common than one might expect at the outset. This link is best captured by the second and third preambular paragraphs of the United Nations Convention against Corruption, a treaty that has received almost universal acceptance.

Because it ‘takes two to tango’, high-level official corruption depends on collusion between corrupt leaders, their families, friends, and other politically exposed persons, PEPs (Dr Radha Ivory has called them the ‘bad guys’ in her new book: ‘Corruption, Asset Recovery, and the Protection of Property in Public International Law: The Human Rights of Bad Guys’), and banks that frequently provide safe havens for the funds. And the bad guys’ accounts’ details with these banks are often shrouded in secrecy.

Ibori: a NIgerian governor laundered money through foreign banks

Ibori: a NIgerian governor laundered money through foreign banks

The problem of safe haven jurisdictions is further exacerbated by the push for profits derived mostly from corrupt money from developing regions like Africa. This profit incentive also provides an explanation for the reluctance of many financial institutions to check, limit, or stop the laundering by high ranking corrupt public officials, of embezzled public funds.

This practice has become endemic and has in fact gone on for many years but rarely is any meaningful or consistent action taken by the international community or governments that supposedly regulate the banks. As it is often the case, the Western press and politicians are quick to denounce African corrupt leaders for causing so much suffering for their people while avoiding the bigger picture: the complicity and culpability of banks and financial institutions within their own borders.

It is beyond doubt that African women, men and children are paying the price in terms of schools not being built, environmental damage, bridges not fixed to standard and hospitals unable to offer necessary medicines.

Yet, the banks that accept, keep and profit from corrupt funds are rarely investigated or held to account. Rather than facing scrutiny and sanctions for failing to observe the most basic anti-corruption and anti-money laundering standards (such as identifying and scrutinising the accounts of corrupt officials), and consequently, for their roles in fuelling corruption, poverty and associated human rights violations in Africa, these banks are often pumped up with state subsidies.

Good, responsible banking involves always knowing your customer but many banks claim to be unable to do this because of a flimsy excuse of ‘understaffing’. The simple fact of the matter is that these banks are aiding and abetting those who have turned national patrimony into a ‘cash-cow’. Recovery of any stolen public money or the profit accruing from it is difficult, time-consuming and very expensive.
But it is all too easy to focus on corrupt African leaders gleefully behaving badly.

To be sure, ‘African leaders’ share primary responsibility for the appropriation of the commonwealth for personal gain, and it’s certainly necessary to have prosecutions and wide-ranging inquiries and restitution for their citizens who are the ultimate victims of corruption.

A strong and effective leadership and clear and genuine commitment to achieve full respect for internationally recognized human rights—not just civil and political rights—but also economic and social rights of African women, men and children, is required to make African states more transparent, inclusive and accountable.

But the persistent failure of many international banks to stop African public stolen funds from being deposited with them in the first place can no longer be ignored or allowed to go unaddressed or un-remedied.

So far, the responses by banks and their home governments to the human rights and other problems caused by facilitating flight of ill-gotten funds from Africa and elsewhere and then keeping and profiting from the funds have proved far from satisfactory; that has to change.

An important part of the solution is to change international banking to make it difficult for senior states to find safe havens for their ill-gotten wealth.

Banking institutions and individual operators must embrace professionalism and integrity when they come in contact with corrupt officials from developing countries. Banking deserves to be treated as a profession, rather than solely a series of trading and profit-making activities.

Further, any ongoing plans by banks and their home governments to fight corruption and bad governance in the financial sector and to avoid another banking crisis must bear in mind these important points. The idea of secrecy first, public interest second can’t be good for business in the long run.

There is nothing intrinsically wrong for banks to also operate as public benefit companies, especially given their complicity in corruption, money laundering, poverty and associated human rights violations in developing countries. It is time to accept that banks have social responsibility and wider public interest obligations to discourage high level official corruption in Africa. We need credit-creating banks – but acting fairly, justly, and for the greatest happiness of the greatest number.

The argument can be made that because of their access to corrupt officials’ transactions, banks and financial institutions are well placed to play a key watchdog role to detect and prevent money laundering by this category of clients. Thus, in relation to stolen public funds at least, this duty of due diligence would at the minimum demand complete fidelity to the public trust. If this is so, victims of corruption and public interest groups can rely on human rights law to ensure compliance with the duties of due dili­gence and know your customers rules, thereby enhancing the effectiveness of the rules in practice.

This public trust function would be undermined, for example, if financial institutions were to unreasonably withhold information on transactions concerning corrupt officials and their families and friends from the public upon request. Allowing vic­tims of human rights violations caused by corruption to access their records can act as a powerful dissuasive tool, as it can help to discourage potential corrupt senior state officials from engaging in corruption (and money laundering) in the first instance, knowing full well that the chances of being found out within the financial system are high.

While financial institutions have ethical duties in relation to their clients, such duties should not be allowed to trump the overwhelming public interest consid­erations involved in detecting and preventing public funds derived from corruption (an illegal act) from being subject of money laundering.

But it might be necessary to shield financial institutions from the risk of litigation or liability for disclosure of information on the ground of neces­sity and public interest if they are to be encouraged to play a more proac­tive role in detecting and preventing money laundering.

The proposed enhanced public interest role for financial institutions may well help to reverse the perception about these institutions as being part of the money laundering conundrum (often considered to be carrying out the instruc­tions of corrupt officials) and thus contribute to changing public attitudes to them, which in the long term may create an ethical (and profitable) business environment for the institutions.

Financial institutions can recoup any potential fall in the profit margin that may result in the short term, by for instance establishing new areas of work and consultancy services in the field of anti-money laundering.

But the open question remains whether the proposals highlighted here have got the political vehicle to get traction with the public to generate the necessary pressure, and whether the banks and their home governments are ready to ‘walk the talk’ and fulfil their inherent commitments to global distributive justice.

Kolawole Olaniyan, PhD is Legal Adviser at Amnesty International in London and the author of ‘Corruption and Human Rights Law in Africa’.

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One Comment

  • Allan Ramlall says:

    Your article is very interesting a relevant to current Anti-Money Laundering and the Counter of Financing of Terrorism issues. When I conduct Due Diligence on foreign exchange transactions executed with banks located in Africa, I advocate a very strong Know Your Customer policy. Key to my requirement is Ultimate Beneficial Ownership of 10 % and above equity criteria. My view is that this strict adherence adds transparency plus deters possible money laundering activity – especially in tax evasion. However, as stated in your article – how trustworthy are the Supervision and Monitoring policies on deposit-holders in the bank itself. We have to rely on the bank Compliance Internal Policy, Procedure and Controls. In addition, we are relying on the domestic regulators policing the bank itself to make sure that deposits are not originating from criminal sources and more importantly funds from Political Exposed Persons (PEPS). I am only in a more comfort level if there is shareholding in the bank which must include banks from core European Zone or the United States. In this way, these specific overseas shareholders will insist on more stringent AML/CFT requirements followed by on-going monitoring.

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