From London to New York to Cyprus, Fraud and Financial "Insanity"
Bill Black: Standard Chartered admits to fraud, no one fired or prosecuted;
Cypriot people force government to give up on taxing smaller depositors - March 21, 2013
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William K. Black, author of The Best Way to Rob a Bank is to Own One, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.
Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.
Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The Black Financial and Fraud Report with Bill Black. He joins us now.Bill's an associate professor of economics and law at the University of Missouri-Kansas City. He's a white-collar criminologist, a former financial regulator, and author of The Best Way to Rob a Bank Is to Own One.Thanks for joining us, Bill.BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.JAY: So what do you got for us this week?BLACK: Well, first we have Standard Chartered, one of the largest banks in the world, and one that claimed great virtue but is another one that has exploited the cesspool that is the City of London, which won the competition in laxity by having the weakest regulation in the world of any major money center. So Standard Chartered got caught by the New York prosecutors, and it turned out they not only were violating all kinds of laws and money laundering and sanctions and such, but they actually had training sessions on how to fill in the reports deceptively to fool the regulators and disguise the crimes. And the New York prosecutors, to their credit, regulators, went forward and got a very significant penalty, and the federal folks were embarrassed into taking an action. And the state action was sufficiently vigorous that something really unusual happened. And we can see today one of the benefits of that unusual thing happening. The unusual thing was that there was an actual admission in the settlement document by the bank. So, most typically, the Justice Department and the Securities and Exchange Commission do these useless settlements in which the defendant neither admits nor denies anything in it, and, you know, there's no way you can use that to do anything effectively. So Standard Chartered, though, signs one that says, yes, we did it, and we did it on purpose, we violated the law. Yesterday the Standard Chartered head is being asked in a press conference, hey, did anyone get fired for running all these deliberate frauds? I mean, these are massive frauds measured in the at least hundreds of millions of dollars, quite possibly billions of dollars. And he answers, no, we certainly didn't do anything intentional. Little clerical errors, you know, happen from time to time. Well, the Justice Department went berserk, because, of course, they'd signed this agreement saying, yes, in fact, they did violate the law, and they did so intentionally, knowingly. And so the head of Standard Chartered has actually had to issue a press release doing, oh, I'm sorry, I'm sorry, I was completely wrong, yes, we did it intentionally. But, of course, that leaves the question: so why did nobody lose their job? And apparently, nobody even loses their bonuses for these massive violations.JAY: How about the other question? Was anybody charged? I mean, if they've acknowledged they did it deliberately, isn't that illegal?BLACK: Oh, yes, but they're a too-big-to-prosecute bank, and we are now treating too-big-to-prosecute banks as if their officers were too big to prosecute. And indeed we treat their former officers that have already left employment as if they're too big to jail. So this is a baby step by our Justice Department, and as I said, they don't even get primary credit for it. It was the State of New York that pushed this thing and got stronger requirements. But this is just the limited example of why it pays to actually force the defendants, the massive defendants who have violated the law, to admit that they've done so.JAY: And do you think the way the Obama administration has sort of tipped their hat so that people know that they believe in this too-big-to-prosecute, has that not also affected the media, that everybody says, oh, there's not really going to be much out of this, so why should we make much out of it? I mean, the media seems to lay off these issues, where you'd think there'd be big front page scandalous stories.BLACK: Yeah, you would think that actually this was the story of the decade, that the Justice Department of the United States of America took the official position that there was a group of institutions--a group of institutions which, by the way, make about 40 percent of corporate profits in America--that could commit crime with complete impunity, that their officers commit the crimes with complete impunity, and that they could walk away wealthy because of their crimes. JAY: And I'm not saying this as a--it's going to sound like a joke, but I actually mean it more deeply than a joke--it's precisely because they have 40 percent of corporate profits they're in this position never to get charged, because you can spread that money around, and politicians are always out looking for money.BLACK: It's that, and it is the fact that once the institutions get this large they become systemically dangerous. And so the regulators fear taking them on because they fear--well, actually, their statement, their definition of these systemically dangerous institutions is that the next time one of them fails--and it's when, not if--it will cause a global financial crisis. Now, that, of course, is the broader insanity. Why would you live--there are roughly 20 of these in the United States and roughly 40 outside the United States. Why would you live with 60 swords of Damocles constantly hanging over the global economy instead of getting rid of them since they're also incredibly inefficient? They're too big to manage, too big to regulate, too big to prosecute. That means they're too big to exist.JAY: Well, let's talk another bizarro situation, which is a sort of reflection of the same problem, what's going on in Cyprus.BLACK: Okay. So Cyprus is a great one. Cyprus, of course, is a very tiny country with international issues because of the division between ethnic Greeks and Turks, and we have a military occupation, a portion of Cyprus by Turkey that isn't recognized by the rest of the world. And in the midst of all this, we have a banking crisis associated with but not completely determined by the Greek financial crisis. And so we have the good old troika again of European institutions that are--come in and going to deal with things. And we have the fact that there's a German election coming up, and domestically the Germans are fed up with paying bailouts, even relatively tiny ones that would be needed in Cyprus. So they led the troika charge--this is the E.U. institutions--that said, you, Cyprus, have to come up with a big chunk of the bailout, and we say that you should charge the depositors for the bailout. Now, they included in this the insured depositors, the people under the EUR 100,000 insurance limit, which is kind of strange, because just about a week ago the Europeans with great fanfare said, hey, we have a policy on how to deal with bank failures, and our policy is the insured depositors will never suffer any loss. And the Cypriot government promised their people all through these negotiations, one thing that will never happen is there will be no charge to insured depositors. So, of course, what did the Europeans insist upon? A charge to depositors, including insured depositors.JAY: Which means the small--people with relatively small amounts of money.BLACK: That's right. And lest you think that the Cypriot government are the good guys in all of this, the Cypriot government at that point says, well, if we're going to have to charge depositors, we're going to charge the insured depositors, the little guys, a pretty hefty fee: 6.6 percent of their deposits they're going to lose. And they did that because they wanted to reduce the losses to the really big depositors beyond the insurance limit. And they kept that percentage loss down to 9.9 percent, which they felt psychologically it was critical to keep it under 10 percent, because it turns out that Cyprus's primary strategic plan for economic development is to be the money launderer for the scum of the earth. And in particular, they really like the Russian oligarchs, who are bleeding money out of Russia, evading taxes, and doing God only knows what worse with the money as well. And so Cyprus's government, their big strategic thing was not to protect the little Cypriot depositors but to protect the big Russian depositors, whereupon the Cypriot people went crazy and they adopted a wonderful thing. They started writing "no" on the palm of their hand and holding up their hands in public to make this protest. And the measure became so unpopular that when the parliament of Cyprus voted on it, it didn't get a single vote in favor of the plan, so there all these kinds of negotiations. And by the time anyone, you know, is looking at this, God only knows what the new plan will be, but it is one completely screwed up interchange driven both by insanity at the E.U. level, IMF, and the Cypriot government. And now we have Slate's Matt Yglesias giving two cheers to all of this insanity, saying that it was a well-structured plan, that it was a good thing that they were causing depositors to suffer losses. He wished the losses to the small depositors were smaller, but still wanted them to have losses, and then proposed: hey, why doesn't Cyprus solve the problem by just selling its claim to the remainder of Cyprus to the Turkish government?JAY: Brilliant. And then the other thing they're talking about is to stop the Russians from all pulling their money out of the Cypriot banks, bartering off or handing off sections of the Cypriot energy fields off the coast, which apparently could be quite rich.BLACK: And this follows discussions in German parliament about demanding that Greece sell islands to the creditors to--you know, basically this is what happens when you give up a sovereign currency and adopt a non-sovereign currency like the euro: you lose essential attributes of sovereignty, and you end up in a situation in which literally you're being coerced to put your country up for sale.JAY: And, of course, alongside this will be some kind of severe austerity measures in other areas of the life of the people of Cyprus, because in the final analysis they're going to try to make them pay for all this.BLACK: Yes. And an important gauge in Europe that when it goes below 50, it signals increasing recession or contraction, has just gone down substantially, showing unexpected weakness even in Germany and France. So people are now--economists are now revising their projections to believe that the recession in the Eurozone is going to last longer and be more severe.JAY: Craziness. Alright. Thanks for joining us, Bill.BLACK: Thank you.JAY: And thank you for joining us on The Real News Network.
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