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Europe’s biggest banks make mockery of morality
April 15, 2017, 4:14 pm

“We do the right thing. We have a single, simple purpose – to serve customers well… We want to be trusted, respected and valued by our customers, shareholders and communities, reads the corporate statement by the Royal Bank of Scotland (RBS), one of United Kingdom’s leading banks.

Despite this, RBS has not served its customers well and they certainly have not been doing the right thing. In September 2010, the bank agreed to pay a fine of £28.59 million (then around $45mn) after admitting to breaches of the law on pricing information. Exactly six years later, the bank was once again in the dock, this time over alleged wrong doing in selling securities mortgage in the United States. The bank struck a deal with the authorities whereby they admitted to no fault but agreed to pay a fine of $1.1 billion.

But RBS in not an outlier in global banking circles as evidenced by the repeated acquiescence of guilt and agreements to pay fines by some of the leading banks in the UK, Europe, US and elsewhere. The insidious behavior of leading banks is only symptomatic of the deeper malaise affecting financial systems in many countries.

Recently several banks in the UK, accused of complicity in an international money laundering scam, came out with canned responses that smelled of hogwash and was just as revolting.

Similar responses from spokespersons of the accused banks included:

Barclays: "Barclays complies with the rules and regulations in all the jurisdictions in which it operates and has systems and controls in place to mitigate the risk of the bank being used to facilitate financial crime.

HSBC: "The bank has systems and processes in place to identify suspicious activity and report it to the appropriate government authorities."

UBS: "UBS applies a robust money-laundering prevention framework across its business operations globally, consistent with locally applicable regulations."

RBS: "We are committed to combating financial crime and money laundering in line with our regulations and have controls and safeguards in place to identify, assess, monitor and mitigate these risks."

If all of these banks steadfastly comply with rules and regulations, and adhere to frameworks designed to thwart criminal activity, the question that comes up is, why were they standing in the dock accused of funneling illicit money?

Banks should realize by now that touting lofty principles and highlighting the robust systems and processes in place to prevent or mitigate risks, is no longer enough to regain the public’s trust that they nonchalantly violate repeatedly.

It appears that today, the question most banks ask when evaluating a risky venture is, “Can we get away without being caught, or at least, without being punished?” Legality of the issue is often only an after-thought, and whether it is ethical correct or morally right is never even raised.

Now a new report by Oxfam, and Fair Finance Guide International, show that in 2015 Europe's 20 biggest banks registered over a quarter of their annual profits from their subsidiaries in tax havens — well out of proportion to the number of employees or level of real economic activity that occurred there.

The report, 'Opening the Vaults’, traces this discrepancy between profits and activity level to the use by banks of tax havens to circumvent paying their fair share of tax. These tax-haven subsidiaries also facilitated tax dodging and to circumvent regulations and legal requirements for the banks’ high-value clients.

The research was made possible by new European Union (EU) transparency rules that require European banks to publish information on the profits they make and the tax they pay in every country they operate. The report finds:

Subsidiaries in tax havens account for 26 percent of the profits made by the 20 biggest European banks — an estimated €25 billion (then $27.5bn) — even though these branches account for only 12 percent of banks' turnover and 7 percent of the banks' employees.

Subsidiaries in tax havens are on average twice as lucrative for banks as those elsewhere. For every €100 of activity, banks make €42 of profit in tax havens compared to a global average of €19.

It would appear that bank employees in tax havens are four times more productive than the average bank employee — generating an average profit of €171,000 per year compared to just €45,000 a year for an average employee.

In 2015, European banks posted at least €628 million ($691m) in profits in tax havens where they employ nobody. For example, the French bank BNP Paribas made €134 million ($147m) tax free profit in the Cayman Islands despite having no staff based there.

Some banks are reporting profits in tax havens while reporting losses elsewhere. For example, Germany's Deutsche Bank registered low profits or losses in many major markets in 2015 while booking almost €2 billion ($2.2bn) in profits in tax havens.

Meanwhile, the UK banks included in the report — the usual trio of HSBC, Barclays and RBS, plus Lloyds and Standard Chartered — reported combined profits of £9 billion ($12bn) in global tax havens, equivalent to 67 percent of their profits.

Oxfam found that £522 million ($671m) of the £9bn was made in six UK-linked tax havens, where they paid just 7 percent tax on their profits, compared to the UK corporate tax rate of 20 percent.

Luxembourg and Ireland are the most favored tax havens, accounting for 29 percent of the profits banks posted in tax havens in 2015. The 20 biggest banks posted €4.9 billion ($5.4bn) of profits in the tiny tax haven of Luxembourg in 2015 — more than they did in the UK, Sweden and Germany combined.

Even if we concede that morality and finances are antonyms in the parlance of modern banking, it is still hard to accept that banks repeatedly get away with engaging in such sneaky and morally-corrupt behavior. Clearly, this happens because of inadequate deterrents and consequences for individual bankers who engage in such wanton behavior. At the most, a bank found guilty of fraudulent activity is fined a relatively paltry sum and no individual banker is found culpable and sent behind bars. On the contrary, top management in such banks are often rewarded with fat bonuses and get to retire with hefty golden handshakes.

Many developing nations are being cheated out of the money needed to tackle poverty and inequality by corporate tax dodgers, with poor countries being hit the hardest. Tax dodging by multinational companies costs poor countries over $100 billion every year. This is enough money to provide an education for the 124 million children who are not in school and fund healthcare interventions that could prevent the deaths of at least six million children.




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