Forex and other bank scandals

It comes as no surprise, but certainly with a touch of envy, that one reads how many illuminati (including an unpublished list from Malta) were lured by the secrecy of Swiss banks where they could accumulate and protect their wealth.

Conspiracy theories are plentiful about corrupt governments in shady African countries led by their Mandarins, and how they embezzled money and robbed the people they were meant to serve. Regrettably, these are no longer conspiracy theories created by the have-nots but true stories leaked by recent investigations instigated by a team of global journalists in the Swiss Leaks project and the Panama Papers that provided details on covert banking transactions.

The Swiss Leaks scandal centred on around 100,000 HSBC account holders. Ironically, beyond partisan politics, there has been a push by the public to know more about effective regulation in Malta after Kristy Debono, shadow minister for financial services, accused a major bank in Parliament of malpractices in its banking procedures. Following such allegations, the bank conducted an internal investigation which revealed no irregularities. Panama Papers disclosed over 700 cases of local names besmirched with potential tax avoidance, with bank accounts opened and maintained in a number of tax havens by principals of top law firms and senior partners of the Big Four audit firms. The Opposition ruffled no feathers when it said that such intermediaries are merely advisers to their clients and in its opinion have not aided and abetted the client in the opening of companies in shady tax havens.

Certainly fraud and its cousin corruption are contagious and the onus falls squarely on man- agers/political masters to detect and eradicate it. This is not a moment too soon when one recalls the collapse of La Valette Property Fund, the sudden news of Nemea bank going into administration and the failure of a number of fund operators, which left a number of worried investors. But do these peccadilloes always hit the headlines around summer time as we learn about a Forex scandal in London by HSBC’s global head of foreign exchange trading and an accomplice who were arrested this week.

The two traders are accused by the US Department of Justice (DoJ) of using inside information to profit from a €2.6bn currency deal. The share of the global Forex market prior to Brexit was massive and handled about 40 per cent of the world’s dealing which flows through trading rooms in London. The Forex scandal drew the attention of the DoJ, which claimed that the traders timed the purchase in order to maximise its effect on the value of the British currency. As a result, it is alleged they were able to generate significant profits for the bank. They are also accused of concealing their actions from the client. So far, HSBC has said that it does not comment on individual employees or active litigation. The DoJ said that HSBC earned roughly $8m profit from the currency trades it conducted for the client.

This is a complex operation referred to as “front running” which can be described as an abusive way for a broker to benefit from a client’s trade. When companies or individuals want to buy a substantial amount of currency – for example dollars in exchange for pounds – they normally go through a broker. A large purchase can push up the value of that currency. Knowing this, the broker can buy dollars on his own account ahead of the deal, carries out his client’s transaction, watches the value of dollars rise, and then sells his own dollars at a handsome profit. Put simply this type of deal is advantageous to brokers and HSBC, and exploits the buyer company which instructed the broker to execute the foreign exchange transaction.

It is fascinating that in this wired world there is no physical Forex marketplace and nearly all trading takes place on electronic systems operated by the big banks. As a rule, dealers display the prices at which they are prepared to buy and sell currencies and users of the system place orders with the click of a mouse. Prices of currencies change according to supply and demand. For example, the US dollar slides from 1.50 to the Sterling prior to Brexit to a low of 1.28. In volatile trading, currency rates are constantly changing on a second-bysecond basis as currencies respond to the changing flow of economic news. Against this background, it would not be surprising if systemic malpractice by rogue dealers were to continue in the immediate future. Financial institutions and high street banks grabbed a new opportunity to make money from the increased size and volatility of the Forex market. Today only a fraction of currency trading is directly related to the original purpose of facilitating cross-border trade: the rest is speculative.

Regulators knew that lighttouch regulation was an invitation to the financial services industry to gently massage the rules and now with the uncertainty in the markets following the Brexit vote, it is time to take stock of the reputational risk for the London Forex market and develop more intrusive supervision. Certainly there is no room for complacency in an industry where corporate memories of Libor rate rigging are still fresh in our minds and “front run- ning” rewards for beating the market are attractive. Readers may feel smug saying that such massive scandals sound sensational in foreign media and console themselves that our own squeakily clean business community is immune to acute scandals. In other words, it does not happen in our backyard. Perhaps this is true given the limitations in size and the modest complexities of our business sector lead to closer surveillance by the financial regulator.

Be that as it may, we are not immune to financial peccadilloes lurking under the surface; for example, reflect how the incidence of financial fraud/corruption had been uncovered in 2012 by MaltaToday, which alleged kickbacks paid in EneMalta since 2004 in the oil procurement division. A well-known businessman (who happens to be the cousin of the ex-energy minister) resigned as president of the Malta Chamber of Commerce, after being called in for questioning by police about his previous role as chairman of EneMalta, while seven other individuals are currently under investigation on alleged kickbacks and their assets frozen pending the outcome of their indictment. A rogue trader (local agent of Trafigura, a massive oil trading agency) involved in oil procurement was granted a Presidential pardon by the previous administration on condition that he reveals details of the scam. Inter alia, he revealed deficiencies in the way selection was carried out on bids (which amounted to around €400 million annually) and certain instances where no written minutes were kept during the adjudication process. Furthermore, a journalist at the Times of Malta had commented about Island Oil Bunkers Ltd, a local company providing oil storage facilities which had reported massive losses between 2003 and 2011 in spite of a staggering turnover of US$1,300 million. Strangely, all audit reports are clean and unqualified. In conclusion, when relaxing on the beach this summer it may be no consolation to blame heightened uncertainty in markets post Brexit which really and truly has ruffled the feathers of financial regulators. Sadly there is no respite as the fight against fraud/corruption continues unabated.