As a society we worship ‘big’. The bigger the better — whether it’s a company, building, pay packet, yacht or car. You name it, we judge most things by their size and scale.
In business, it’s usually a prerequisite to expand the enterprise. Shareholders normally demand and expect it, they want to see their investments grow, they pressure for even greater returns. There is nothing wrong with this, unless a corporation becomes so big that it is unable to manage itself, and because it is so large and connected, we’re scared to apply the normal brakes and controls, such that potential wrongdoing goes unpunished.
This is what occurred with HSBC. Already an enormous international bank, it took the decision to grow even bigger. At the time it made the move, it had been judged the ‘best-run bank’ in the world. That accolade was not enough, they wanted to be number one, to outstrip the mighty American behemoths, in particular Bank of America and Citi.
The result was catastrophic. While HSBC management was busy making acquisitions and doubling the size of the workforce, in one corner of the world, in Mexico, unscrupulous customers exploited the lack of attention. This is the subject of my book, Too Big to Jail – Inside HSBC, the Mexican drug cartels and the biggest banking scandal of the century.
It details how HSBC facilitated the laundering of billions of dollars, drugs money, by the Sinaloa cartel headed by the notorious El Chapo.
HSBC had bought a relatively small bank in Mexico as part of its overseas growth programme. That bank, Bital, paid lip service to compliance. HSBC managers and compliance officials warned as much. Mexico’s banking supervisors knew the same. The feeling was, however, that under HSBC, the new acquisition would soon be brought to heel. That didn’t occur; instead, Chapo and his criminal associates took full advantage of the services and international network now available to them as part of the wider HSBC ‘family’. Safeguards that should have been applied against money laundering simply weren’t.
Law enforcers in Mexico and the US watched in horror as the Sinaloa, the world’s biggest drugs organisation formed an unlikely relationship with what had duly become the world’s biggest bank, a corporation hitherto known for its fiercely disciplinarian approach and traditions. American investigators stepped in and wanted to throw the book at HSBC, bringing criminal prosecutions against the bank and its executives. Then, however, they were made to worry that to do so risked weakening the entire global banking system, so in late 2012, HSBC was hit with a fine and entered into a Deferred Prosecution Agreement, promising to reform its ways.
The $1.9 billion penalty was a US record, but it amounted to only five weeks’ worth of the bank’s profits. And, same as in 2008, when no senior banker was jailed over the banking crisis, when banks were deemed ‘too big to fail’ and had to be bailed out by governments worldwide, no HSBC banker was charged over what, arguably, was a more clear-cut, egregious episode. As for improving its processes, HSBC was fined £91.3 million ($114.5m) late last year by the UK Financial Conduct Authority for “serious weaknesses” in its money-laundering procedures.
This leaves society with some awkward soul-searching. We now have many corporations, not only banks, that are mightier than countries. They employ legions of lawyers and lobbyists, the best in the business. They run rings around the invariably hard-pressed, cash-strapped public officials. Their reach and connections extend everywhere. Politicians feed upon their power and investment; and do not want to fall foul of them. In a globalised, ferociously competitive marketplace, governments are all too aware these multinationals that supply jobs, cash and expertise can always go elsewhere.
When he was governor of the Bank of England, Mervyn King warned that the support handed out by governments in the 2008 crisis “created possibly the biggest moral hazard in history”. Why would a bank behave well if it knew the risk of failure would be borne by someone else? King left the Bank of England in 2013 and said this at his retirement dinner, some 18 months after HSBC was let off the hook: “Governments, regulators, prosecutors and non-executive directors have all struggled to come to terms with firms that pose a risk to taxpayers, cannot be prosecuted because of their systemic importance, and are difficult to manage because of their size and complexity. It is not in our national interest to have banks that are too big to fail, too big to jail, or simply too big.”
As it happens, HSBC’s largest shareholder, Chinese insurer Ping An, is currently calling for the giant bank — Britain’s biggest — to be broken up. Its reasoning is based on HSBC focusing more on high-growth Asia, especially China, rather than a desire to bring the firm into check.
Analysts and investors in HSBC will assemble next week in Birmingham at a pre-arranged meeting to discuss the bank’s UK retail strategy. Clearly, Ping An’s initiative will be foremost in minds.
It’s a hard one to call as HSBC is perpetually torn between trying to be a global bank headquartered in London and a bank that is faithful, and closer, to its roots in Hong Kong and China. In several respects it makes sense to ditch the boring old UK and European bit and concentrate on China and Asia.
Success, though, is not guaranteed. HSBC shareholders will be mindful of the example of Prudential, which hived off its UK arm, renaming it after its asset-management brand, M&G, in 2019. Prudential, which is centred on Asia and Africa, has so far failed to match expectations — all that has occurred is that its shares have tracked those of the less sexy M&G.
Food for thought for followers of HSBC then. Meanwhile, we should be asking ourselves more profound issues, such as just how big we want our businesses to be, how can we exert meaningful control.
Too Big to Jail – Inside HSBC, the Mexican drug cartels and the biggest banking scandal of the century is published by Macmillan