Home Affairs Committee - Drugs: Breaking the Cycle - Minutes of EvidenceHC 184-II

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House of commons



Home Affairs Committee


Tuesday 30 October 2012


Evidence heard in Public Questions 538 - 569



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Oral Evidence

Taken before the Home Affairs Select Committee

on Tuesday 30 October 2012

Members present:

Keith Vaz (Chair)

Nicola Blackwood

Dr Julian Huppert

Steve McCabe

Bridget Phillipson

Mark Reckless

Mr David Winnick


Examination of Witnesses

Witnesses: Lord Turner, Chairman, Enforcement and Financial Crime Division, Financial Services Authority, and Tracey McDermott, Enforcement and Financial Crime Division, Financial Services Authority, gave evidence.

Q538 Chair: Lord Turner, Ms McDermott, thank you very much. Can I apologise for keeping you waiting? There was a Division right in the middle of the session. Ms Phillipson has declared her interest. I will declare my interest as having known you personally for 30 years. Welcome to the Home Affairs Committee.

Do you think, having done this job for four years, that there is an increase or a decrease in the amount of money laundering by those involved in drugs within our financial institutions?

Lord Turner: I would have to say that I do not know the answer to that, and I do not think there is anything about the way in which we operate and the role that we particularly play, the FSA, which would enable us to answer that question. We have, under the Money Laundering Regulations 2007, a responsibility to make sure that firms have systems and controls to deal in general with money laundering, but money laundering there is not specifically to do with drugs. It could cover money laundering that relates to the receipt of money from what are called politically exposed people-people who have political offices and who, therefore, could have received money in a corrupt fashion. It might include drugs money. It might include terrorist money, or it could include any other category of financial crime. Because our focus is on making sure that banks or other financial institutions have adequate systems and controls in place, it would be very difficult for us to have a specific point of view on the drugs subset of that, in that we are not typically involved right down in the detail.

The other thing to say is, of course, that once one actually gets to the detail of what is going on, the core mechanism is that firms are required to produce suspicious activity reports, which go to SOCA which then follows up on those.

Q539 Chair: We will come to that. You saw the outcome of the HSBC case.

Lord Turner: Yes.

Q540 Chair: And the money, the $7 billion that was transferred from Mexico to the United States-the majority coming from Casa de Cambios. The Senate talked about a "pervasively polluted" culture of British banks, in particular this British bank. Didn’t that set off alarm bells in the FSA? Here was the Senate in the United States talking about the pervasively polluted culture of a British bank. Didn’t you worry that this was much bigger than you suspected?

Lord Turner: Well, it is certainly something that we are concerned about. I have read the Senate report. We are obviously close with the American authorities in the discussions on the HSBC situation and you are quite right: reading the Senate report on HSBC, the assertions being made are very prima facie and very concerning. Whether that carries implications for other UK-based banks, we do not know. It will certainly be a spur for us to look in more detail at what we are doing in the area of anti-money laundering. It is true to say that it is important to understand that there is a difference in the legal status of HSBC from the other major UK banks in this respect. HSBC is organised as a holding company. We regulate the UK and European bank and we do not, because of that organisation as a holding company, have any regulatory oversight over the subsidiaries and branches overseas. That is somewhat different from the situation that applies, for instance, with other international banks such as Barclays, RBS or SCB.

Q541 Chair: I accept that there is a different structure, but it must concern you, as chairman of the body that is supposed to regulate banks, when you hear Martin Woods, the whistleblower in the Wachovia case, saying, "The FSA were involved in what was a catastrophic failure of banking regulation. They gave the bank a clean bill of health for five years despite an ever-growing mountain of evidence against it". If you look at the particular cases of money laundering, Coutts were fined £8.7 million and Lloyds were fined £350 million. At HSBC, as I said, $7 billion was laundered. At the Barclays private bank, the UK Government froze £54 million, which was held in a private bank, at the request of the United States. But there were no prosecutions of anybody as a result of all those cases. Does it not worry you that here we have these vast amounts of money, figures that indicate that 85% of the profits of the drug dealers of South America end up in either the United States or in the European Union? Surely somebody must be looking for this money.

Lord Turner: We have a responsibility to make sure that there are reasonable anti-money laundering controls in place. I think you are quite right that what has occurred in relation to HSBC is something that is going to mean we focus even more on it; for instance, at a board meeting later this week we will be debating the issue as to whether this indicates that we need a greater focus on these issues than we have had in the past. I would say that for the last two or three years, we have been steadily ramping up our focus on these issues. For instance, the report we produced last year on banks’ management of high money-laundering risk situations, which followed the launch of a more intensified, thematic review of those issues in 2010, very clearly set out a set of concerns that we had about the controls that they had in place. It is quite interesting that the key area of concern that comes out of that report, which you have probably seen, was more on the politically exposed persons area. There were some concerns on the correspondent banks area but not as many and, broadly speaking, we did not find problems in that review on things to do with wire transfers and the identification of the origin of money in a wire transfer. We did not, in that, find the exact equivalent of some of the issues which existed or appear to have existed in relation to Mexican Casa de Cambios and receipt of cash money.

Q542 Chair: Hand on heart, can you say to this Committee, that in the FSA, in all the meetings you have had and all the regulation you have done, you have no worries about the amount of dodgy money?

Lord Turner: I certainly am worried. We will take the HSBC case.

Q543 Chair: Yes but prior to HSBC, it is clear-

Lord Turner: We have been steadily increasing our focus but again, we are not a law enforcement agency directly in this respect. We are focused, as we should be, on adequate systems and controls to make sure that they are appropriately putting in their suspicious activity reports, and that they have the controls in place. We do not have a huge amount of resources devoted to this area. Our specialist resource devoted to this area is about 20 people. It is not more than that.

Q544 Chair: In the whole of the FSA?

Lord Turner: Yes, the specialist resource. There are other people who are supervisors of banks on a set of issues who will be able to call on that specialist resource. There are people involved in the policy debates with FATF at international level. But the number of people operationally devoted specifically to anti-money laundering, which includes things to do with PEPs as well as drugs or terrorism, is only 20.

Q545 Chair: Do you need more?

Lord Turner: The issue is should we have more. Yes, I think that is a legitimate issue.

Q546 Chair: Obviously the FSA is going, and you are odds-on to become the next Governor of the Bank of England-11-4 this morning, I understand. Leaving that aside, what is going to happen to these very crucial areas that you obviously have some expertise in? How is it going to be divided between the two new organisations?

Lord Turner: They will fundamentally stay in the Financial Conduct Authority because we think of issues to do with anti-money laundering and politically exposed people as things to do with conduct activity-correct conduct-rather than things that directly relate to the financial soundness of a bank in the sense of its capital and liquidity. So they will stay in the FCA. They will stay under the division that Tracey is in charge of. Tracey McDermott is in charge of the whole enforcement and financial crime area. That is staying under Tracey.

Q547 Chair: As one unit, just transferring over, not separating?

Lord Turner: Yes. Essentially it will stay where it is. Fundamentally, the FSA has already divided itself under me, as Executive Chairman, into two separate groups, one headed by Martin Wheatley to whom Tracey reports, to be the Financial Conduct Agency, and the other headed by Andrew Bailey to be the Prudential Regulatory Authority. We are now at the stage where all that really happens next April is that we legally separate them and put them in different buildings.

Q548 Chair: But the work will continue?

Lord Turner: The work will continue, yes, absolutely.

Q549 Steve McCabe: Are you familiar with the remarks of Antonio Maria Costa, the former Executive Director of the UN Office on Drugs and Crime. In a series of interviews, he is reported as saying that drug money laundering kept the banking system afloat at the height of the crisis in 2008, to the tune of $352 billion. In another report, he is quoted as saying that in many instances, drug money is the only liquid investment capital available. Is the scale of the problem he is describing credible to you?

Lord Turner: I did see that report but I do not think it is a credible description of the survival of the global banking system at the end of 2008. I find it difficult to make sense of those comments in that it could only have been the thing that kept the banking system afloat if new money came into the banking system, and new money only comes into the banking system through two routes. One is when people take cash- physical paper currency-and put it into the banking system, and there is no sign that that occurred in late 2008; indeed, in most banking systems in the world, there was a slight flow the other way. The other thing that can go into the banking system is central bank money-provided by the Bank of England, the Federal Reserve, the Bank of Japan, the ECB-and that is essentially what kept the banking system afloat in autumn 2008. You can see that simply from the expansion of central bank balance sheets, which were much bigger than that $300 billion figure. If that $300 billion figure in any way-and I have no reason to know-reflects the money from crime that is in the global banking system, it would have been there before; it did not flow in during that period, and it is, of course, less than 1% of the total assets and liabilities of the total global banking system. This is a very big problem-the issue of how we stop the financial system being used by criminals-but I did not personally think that the problem was well described by suggesting that the role of criminality was essential to the survival of the banking system in autumn 2008.

Q550 Steve McCabe: When something like that does surface, would it be automatic for the FSA to carry out its own inquiry or would you assume, as you said to us, that it is 1% and it did not make that big an impact?

Lord Turner: Well, we would not necessarily look at every statement that comes from everybody. At any one time, people are, for all sorts of reasons, making-

Q551 Steve McCabe: I am asking because I presume this gentleman has a fair amount of credibility, given the organisation he ran, and I am surprised that he is making these claims.

Lord Turner: My understanding is that there is a fair amount of credibility on the specific issues of drugs and money laundering, but even people who have good credibility in relation to that can sometimes make statements relating to financial stability issues that the experts in that area would not recognise as adding much to our understanding of what the problems are. That is what I would have to say in relation to that comment.

Tracey McDermott: I think that is right. I would also say, picking up on one of the earlier questions, that the question of how criminals are using the financial system to launder money is not something the FSA takes the lead in identifying. That is very much something where law enforcement and SOCA in particular-who I know you have already had evidence from-take the lead in identifying how criminals are using money, what new techniques are being used and so on. In our part of that overall picture, we take the role of ensuring that financial institutions have robust systems and controls to minimise the risk of those being used for financial crime. We do work with other agencies, including SOCA, in identifying new risk. So if there is an emerging risk, an emerging way of transmitting money, that is something that we would feed into our own assessment of where we focus our resources.

Q552 Steve McCabe: Are you satisfied that the financial institutions for which you are responsible do have robust systems at the moment to deal with that?

Tracey McDermott: In the report we published in 2011 that Adair has already referred to, we stated very clearly that we were disappointed by our findings in a number of areas; we found that the banks we had visited as part of that review had, in some areas, good controls but had many more weaknesses than we would have expected to see and than we would think were appropriate. We have taken a series of enforcement cases off the back of findings from that thematic review, and we have made it very clear that we expected to see improvement. As Lord Turner mentioned, a lot of those issues were around politically exposed persons, who from a private wealth banking perspective are potentially lucrative clients, and that was an area where we had particular concerns. We did look at correspondent banking, which was part of the area that caused the issues with HSBC in Mexico and the US. We found that there were some weaknesses there and at one of the banks we have taken action against recently, a Turkish bank, it was in relation to correspondent banking controls. But actually we found controls were generally better there. Would I say that we think they are perfect? No. Would I say that we have given a very clear signal as to what we expect? Yes. Do we think they are improving? Yes.

Q553 Steve McCabe: In terms of the problem of tackling economic crime, would a decision by this country to opt out of European Justice and Home Affairs measures have any bearing on the work that you do?

Tracey McDermott: At the moment, the primary thing that we have done is to use the European arrest warrant. We used the European arrest warrant to arrest a suspected insider dealer who was then convicted and sent to jail, which is obviously part of the framework. We also participate in and co-operate with Eurojust and Europol. It would very much depend on exactly what frameworks were in place to ensure that we could have continued co-operation.

Q554 Chair: Are there aspects that you would like to opt into, but others that you do not have a view on?

Tracey McDermott: There are aspects that we have used that are useful to us.

Q555 Chair: Presumably you will be consulted at some stage by the Government on this? Or you will tell them what you think rather than being told?

Tracey McDermott: We will tell them.

Q556 Nicola Blackwood: I wanted to follow up on exactly that point. In the light of the potential for the need for transitional measures, and then for the need to opt in, perhaps with renegotiation on future measures, have you been consulting with your partners and preparing for what you might like and need given the international nature of money laundering and the crimes that you are seeing?

Tracey McDermott: In relation to money laundering in particular, the issue is less relevant, because we are not the prosecuting authority. It is actually more relevant to our role as a prosecutor, which is primarily around insider dealing and market-facing crime. In relation to the generality of the point, we are in regular contact with law enforcement colleagues, both here and overseas, and we would liaise to the extent we needed to in terms of whether there are changes needed, but we would not be taking the lead in those discussions because, frankly, we are a minor player in the law enforcement community compared to others.

Q557 Nicola Blackwood: Can I ask you how your systematic anti-money laundering programme is going?

Tracey McDermott: We piloted the programme last year and are now rolling it out. The intention of the systematic anti-money laundering programme was to focus on some of the larger players and do a very in-depth review of their anti-money laundering controls. This is very resource intensive for us. We estimate it takes four to five people about five months to do this, and the one we did in the pilot involved around 30 to 40 interviews of people at all levels-from senior management through to people on the ground to people who are business facing-as well as reviewing 250 actual files, customer files and so on. We found it extremely useful. We think it gave us a much better understanding of particular banks’ systems and controls, and particular areas of strength and particular areas of weakness. We have decided that we will roll it out now and it will be part of the Financial Conduct Authority approach to anti-money laundering. There will be 14 institutions subject to this systematic anti-money laundering programme, which means that on rotation they will have this deep dive. In addition, we also do thematic work, which is targeted across a range of banks and what we call reactive work-when specific issues come up, we visit a particular institution.

Q558 Nicola Blackwood: My briefing says, and you can tell me if it is right or not, that the programme examines how well the various parts of the institution communicate with each other. Are some risks falling between the gaps and are the banks’ highest risk customers being given the right level of due diligence and monitoring? Is that right?

Tracey McDermott: That would be some of it. It is actually a fairly extensive programme.

Q559 Nicola Blackwood: It is extensive. Where the pilot has run, what were your findings?

Tracey McDermott: I cannot talk about the individual findings in relation to the individual firms, but we found some areas where we thought there was good practice, and we found some areas where we thought that there was work that needed to be done. That is a fairly typical result for in-depth supervisory work. You do not necessarily expect everything to be absolutely perfect when you go in.

Q560 Nicola Blackwood: Do you think that the outcome of running the systematic anti-money laundering programme, which is quite hard to say-

Tracey McDermott: It is very hard to say.

Lord Turner: Yes, it is not exactly a catch phrase.

Nicola Blackwood: Do you think the programme is going to act as a deterrent? Do you think that it is going to improve performance because it is going to be spot-checked? What is the intent of the programme?

Tracey McDermott: There is a range of intents. One is that it is a deterrent because if you know that we are going to be periodically coming around-

Q561 Nicola Blackwood: Do you notify people in advance?

Tracey McDermott: Yes, we do notify.

Q562 Nicola Blackwood: How much notice do they get?

Tracey McDermott: I do not know exactly, but it would not be something that is done as a surprise visit particularly. We occasionally do visits where we do not give people notice, but this would not be that sort of programme.

Nicola Blackwood: This is not that sort of programme, okay.

Tracey McDermott: This is very intensive. This is the sort of thing where you cannot actually manufacture something overnight to make it look as though you are compliant.

Part of it is also about making sure that we have a clear view of how standards are evolving on the ground and helping inform our assessment of risks. To the question your colleague asked about what we see as the risks that are coming in, actually the banks and people on the front line often see new ways of moving money, so that is another source of information for us in assessing the risks and so on. Part of it is around deterrence, part of it is around spotting actual problems, and part of it is around making sure we are close to what is actually happening on the ground.

Q563 Nicola Blackwood: What data will be available publicly in order to improve accountability and boost public confidence? With the allegations flying around, which you have heard today, and with the cases that have been reported, there is obviously this feeling that a lot of banks are hiding away criminals within their walls. A programme like this is designed to try to weed that out and boost public confidence. How much of this will be available in the public domain, and how much will people be able to see as a public assurance exercise as well?

Tracey McDermott: So far, in relation to what is in the public domain, the typical approach of the FSA has been to publish thematic reports. In the one we did in 2011, which is published on an anonymised basis, we talk about examples we have seen at various banks. We do not routinely publish individual supervisory assessments of individual firms, partly because of confidentiality restrictions in the Act and partly because of commercial and sensible reasons.

One of the things that the FCA is doing though, and one of the things we will do before the FCA comes into existence, is to publish in the first quarter of next year a discussion paper on transparency, which goes precisely to your point. It will not be limited to money laundering, but asking if there is more we could do in terms of providing transparency about what we do, whether on an aggregate basis or an anonymised basis, to enable people to see what we are doing, and to hold us more accountable. It is tricky because there are an awful lot of confidentiality restrictions, particularly when you are talking about banking, of course-people’s private accounts.

Lord Turner: Obviously, there are two things that go into the public domain. There are what we call thematic reviews; there was one in 2011 on how banks are doing on their management of high money-laundering risk situations, and we will be doing a subsequent one on the way in which trade finance could or could not be used to deal with anti-money laundering. When we bring specific enforcement cases against specific firms, like the Coutts and Co case earlier this year, we then issue what is called a final notice, which describes what has occurred. Typically, what we would not do is describe an individual firm where we have not discovered something that is subject to enforcement. That is the balance of the way that we deal with transparency at present.

Q564 Mr Winnick: Lord Turner, this is in fact, as you know, an inquiry into drugs rather than money laundering as such, but money laundering obviously comes into it, hence the reason the two of you are giving evidence today at the request of the Chair. On the points that were made by the Chair about the criticism by the United States authorities of various financial institutions in the United Kingdom, do I take it, Lord Turner, that you have given evidence to other Committees, be it of the Commons or the Lords, on these matters?

Lord Turner: No, we regularly appear in front of the Treasury Committee, as you would expect, on issues.

Q565 Mr Winnick: Yes. When was the last time you did that?

Lord Turner: I had three separate sessions, or at least two, during the course of July, which covered the issues relating to LIBOR. They also covered issues relating to the Bank of England Financial Policy Committee on which I sit, which is to do with macro prudential issues. We have meetings with the Treasury Committee once every two or three months because they are the Committee directly responsible for the performance of the FSA.

Q566 Mr Winnick: Presumably you will be asked questions by the Treasury Committee on the points made by the Chair, which I have already quoted from?

Lord Turner: That is possible. I am not aware yet that there is in the diary a meeting with the Treasury Committee specifically on this issue. We do have a session shortly in the diary with the Banking Standards Commission, the joint Commons/Lords commission being chaired by Andrew Tyrie, which although chaired by Mr Tyrie is separate. I am sure they could touch on these issues then because it is about banking standards in general. But at the moment the Treasury Committee has not in the past, nor I think in the immediate future, selected anti-money laundering or financial crime as specific issues on which it has chosen to focus.

Q567 Chair: Thank you. Ms McDermott, in the report you published last year, which Lord Turner referred to, you said, "Again and again we saw the desire to win and keep the business, trump the obligation to honour anti-money laundering rules fully and in good faith". Basically, banks putting profits above compliance. Since you made those comments and since the report last year, have you seen a difference on the part of the banks?

Tracey McDermott: What we have not done yet is a follow-up piece of work where we go back and test to see whether in practice it has happened. When we do this sort of review, we will have some firms referred to enforcement where there is specific action taken. There will also, typically, be supervisory work undertaken with a number of other institutions; for instance, we might require them to have a third party review and so on. I can say with confidence that this has gone significantly further up the senior management agenda, that there is absolute clarity about what our expectations are and that we believe that firms are actually taking steps to try and address these issues. As I said, we have not yet gone back and done further testing.

Q568 Chair: As Mr Winnick reminded us, Lord Turner, this is an inquiry into drugs. I have a quote from you on this: on 5 November 2003-you probably know what I am going to put to you-at the Global Economy Memorial Lecture, "As tonight’s deliberately provocative thought, if we want to help sustainable economic development in the drug states, such as Colombia and Afghanistan"-the Committee has visited Colombia and seen this for itself- "we should almost certainly liberalise drugs use in our societies, combating abuse by education not prohibition rather than launching unwinnable wars on drugs, which simply criminalise whole societies".

Lord Turner: Clearly those points of view were expressed as a personal point of view and are nothing to do with my role at the FSA.

Chair: Of course.

Lord Turner: It is also important to say that as long as society has decided, in its rules, to prohibit drugs or prohibit particular drugs, that is a criminal activity and banks must not allow the transmission of criminal money. A point of view as to whether or not the overall approach is a sensible one does not change in any sense the moral responsibility and the legal responsibility of banks to stick to the rules as they are at the moment. Also, let us be clear, there are other aspects of anti-money laundering that are not to do with drugs but are also very important, like terrorist finance. I think that is a separate point of view; it is a point of view that I happen to hold and, as you know, it is a point of view that several commissions on drugs have, over the years, arrived at. But it does not in any way imply either that any bank is, therefore, entitled to say, "Well, if they think that that is what the rule should be they don’t have to apply this," nor does it in any way imply that the FSA will be other than as rigorous as we should be in making sure that money laundering is-

Q569 Chair: Can you give this Committee an assurance that despite the changes that are going to take place, which are quite important changes in the way in which the financial structure and landscape of this country are concerned, this will remain the focus of the new organisation? What worries us in terms of what the drugs barons are doing is that SOCA is changing, the NCA has been created and the FSA is going; there is a lot of change taking place over the next year and a half. We would not want to see the focus change as to where this money comes from and how it is going to be stopped. Having been to Colombia and been given the figure that 85% of the profits end up in Europe and the United States of America, it does worry the people in the Committee who have been on that visit that this not being taken seriously enough.

Lord Turner: I can give you an absolute assurance that the division of the FSA into the FCA and the PRA will make no negative impact on this. Indeed, I would say, on the whole, it will be positive. In general, I think one of the benefits that we will get from dividing the FSA between the PRA and the Financial Conduct Authority is that we will make sure that we have a group of people in the PRA who are worrying about financial stability and the safety and soundness of banks and the capital and liquidity of banks, even when the rest of the world thinks that the single most important thing is anti-money laundering or defending people against mis-selling. We will have, in the Financial Conduct Authority, people who are focusing on that, even if we were back in 2008 and 2009 and the world financial system was collapsing.

Bluntly, I think in the past that the FSA was doing too much; putting all of those activities into one organisation made it very difficult for the top management to be focused on all those issues. If you were to honestly ask me how much attention did I pay to anti-money laundering in autumn 2008, the answer is not much because the financial system was collapsing and it felt that the single most important thing for myself and Hector Sants and the other most senior people to be focusing on was how we were going to rescue the banking system.

I think the focus that we have in future, of the PRA within the Bank of England and the conduct authority just focused on conduct, makes it more likely that we will get that focus. It is also the case that we have taken the revelations of what appears to have been going on in HSBC in Mexico as a stimulus to make sure that we are doing a drains-up on what are we doing and are we doing enough and should we be putting more resources into it.

Chair: Lord Turner, Ms McDermott, thank you very much for coming.

Lord Turner: Thank you very much.

Tracey McDermott: Thank you.

Prepared 8th December 2012