Tuesday, 31 July 2012

Jersey, Iran and the USA

The recent Senate report into HSBC highlighted problems over transactions that should have been blocked which were allowed by HSBC officials to get past the "filters" that should have flagged up and prevented those transactions. There are several subsidiaries involved - HSBC Mexico, which seem to have been used for money laundering purposes - hardly surprising perhaps, given that Mexico is still such a centre of drug smuggling - and HSBC Middle east, which happens to be incorporated in Jersey, and has therefore turned a lot of media attention towards Jersey.

HSBC Bank Middle East Ltd. (HBME). Incorporated in Jersey in the Channel Islands and owned through a chain of subsidiaries reaching back to the Group's parent corporation in London, HBME oversees a network of financial institutions throughout the Middle East and North Africa. With more than 5,000 employees, HBME provides banking services through nearly 45 branches in Algeria, Bahrain, Jordan, Kuwait, Lebanon, Oman, Pakistan, Qatar, and the United Arab Emirates. In 1998, HSCB Group established "HSBC Amanah," a "global Islamic financial services division" designed to "serve the particular needs of Muslim communities" in compliance with Islamic law. (1)

But what is Jersey's involvement in this, and why is the USA up in arms about it? Matters are a little more complicated than in the case of HSBC Mexico. In fact, the compliance officials were not in Jersey at all. It is simply that the affiliate was used to channel money. This is what the Senate report had to say about what was happening:

From at least 2001 to 2007, two HSBC affiliates, HSBC Europe (HBEU) and HSBC Middle East (HBME), repeatedly sent U-turn transactions through HBUS without disclosing links to Iran, even though they knew HBUS required full transparency to process U-turns. To avoid triggering the OFAC filter and an individualized review by HBUS, HBEU systematically altered transaction information to strip out any reference to Iran and characterized the transfers as between banks in approved jurisdictions. The affiliates' use of these practices, which even some within the bank viewed as deceptive, was repeatedly brought to the attention of HSBC Group Compliance, by HBUS compliance personnel and by HBEU personnel who objected to participating in the document alteration and twice announced deadlines to end the activity. Despite this information, HSBC Group Compliance did not take decisive action to stop the conduct or inform
HBUS about the extent of the activity.

At the same time, while some at HBUS claimed not to have known they were processing undisclosed Iranian transactions from HSBC affiliates, internal documents show key senior HBUS officials were informed as early as 2001. In addition, HBUS' OFAC filter repeatedly stopped Iranian transactions that should have been disclosed to HBUS by HSBC affiliates, but were not. Despite evidence of what was taking place, HBUS failed to get a full accounting of what its affiliates were doing or ensure all Iranian transactions sent by HSBC affiliates were stopped by the OFAC filter and reviewed to ensure they were OFAC compliant.

An outside auditor hired by HBUS has so far identified, from 2001 to 2007,  more than 28,000 undisclosed, OFAC sensitive transactions that were sent through HBUS involving $19.7 billion. Of those 28,000 transactions, nearly  25,000 involved Iran, while 3,000 involved other prohibited countries or persons. The review has characterized nearly 2,600 of those transactions, including 79 involving Iran, and with total assets of more than $367 million, as "Transactions of Interest" requiring additional analysis to determine whether violations of U.S. law occurred.

While the aim in many of those cases may have been to avoid the delays associated with the OFAC filter and individualized reviews, rather than to facilitate prohibited transactions, actions taken by HSBC affiliates to circumvent OFAC safeguards may have facilitated transactions on behalf of terrorists, drug traffickers, or other wrongdoers.

The failure was with HSBC Group Compliance, which took no action when senior officials were informed about these transactions. The heads that rolled were in the UK, or USA, not in Jersey, such as Mr David Bagley. As the Independent reports:

The head of compliance at British banking giant HSBC resigned in front of a US Senate subcommittee today after it emerged the bank had exposed the US to billions of dollars worth of money laundering, drug trafficking, and terrorist financing. Mr Bagley, who had a 20 year career with the bank and is based in London, said: "Despite the best efforts and intentions of many dedicated professionals, HSBC has fallen short of our own expectations and the expectations of our regulators." (2)

So these particular transactions, because they were not screened out by normative checks, meant that it left the bank exposed to transactions "on behalf of terrorists, drug traffickers, or other wrongdoers." In fact, there is no evidence in this case - unlike in Mexico - that those kinds of transactions took place. Instead the most clear violation of US Law has to do with what are called U-turn transactions. But what is a U-turn transaction:

On November 10, 2008, the Office of Foreign Assets Control ("OFAC") of the U.S. Treasury Department amended the Iranian Transactions Regulations, 31 C.F.R. Part 560 (the "ITR") to strengthen the U.S. embargo against Iran by prohibiting U.S. financial institutions from engaging in "U-turn" transactions.  (See 73 Fed Reg. 66541, November 10, 2008.)  U-turn transactions are U.S. dollar transactions involving Iran that are cleared through a U.S. bank.   This amendment is intended to prohibit transfers designed to "dollarize" transactions through the U.S. financial system for the direct or indirect benefit of Iranian banks or other persons in Iran or the Government of Iran.

A U-turn transaction, generally speaking, is a banned financial transaction done by a bank in country A (example: USA) for the benefit of a bank in country B (example: Iran) through offshore banks (example: Switzerland). This loophole is used by Iranian banks to avoid U.S. sanctions for their US dollar based transactions. The phrase "U-turn" applies because the funds are transferred to a U.S. bank and instantly turned back as dollars to a European bank.(3)

The ban on U-turn transactions was being violated, and it is true that this was against US law. It forms part of a framework of sanctions which have been tightened on Iran by the US over the last decades, and while there should be no question that the bank was breaking the law, it should be noted that this is a very murky law indeed. Iran is the "demon" of the Middle East, and has been ever since the Iranian revolution toppled the corrupt repressive regime of the Shah of Iran. That regime, of course, was being propped up in accordance with American realpolitik of the time - dictatorships are a bulwark against communism. Noam Chomskey lays out how this is worded, and what the meaning is behind the words:

The dire threat of Iran is widely recognized to be the most serious foreign policy crisis facing the Obama administration. General Petraeus informed the Senate Committee on Armed Services in March 2010 that "the Iranian regime is the primary state-level threat to stability" in the U.S. Central Command area of responsibility, the Middle East and Central Asia, the primary region of US global concerns. The term "stability" here has its usual technical meaning: firmly under US control.

In June 2010 Congress strengthened the sanctions against Iran, with even more severe penalties against foreign companies. The Obama administration has been rapidly expanding US offensive capacity in the African island of Diego Garcia, claimed by Britain, which had expelled the population so that 
the US could build the massive base it uses for attacks in the Central Command area. (4)

The African Island of Diego Garcia is a shameful episode of British history. Forty years ago its population, then numbering about 2,000 people, were expelled by the British government to Mauritius and Seychelles to allow the United States to establish a military base on the island. They are still trying to return. It has been virtually airbrushed out of history.

Chomsky explains that what really upsets the American government is its lack of control over Iran, which it sees as therefore a "destabilising influence".

The brutal clerical regime is doubtless a threat to its own people, though it does not rank particularly high in that respect in comparison to US allies in the region. But that is not what concerns the military and intelligence assessments. Rather, they are concerned with the threat Iran poses to the region and the world.

Though the Iranian threat is not military aggression, that does not mean that it might be tolerable to Washington. Iranian deterrent capacity is considered an illegitimate exercise of sovereignty that interferes with US global designs. Specifically, it threatens US control of Middle East energy resources, a high priority of planners since World War II. As one influential figure advised, expressing a common understanding, control of these resources yields "substantial control of the world" (A. A. Berle).

Iran's "current five-year plan seeks to expand bilateral, regional, and international relations, strengthen Iran's ties with friendly states, and enhance its defense and deterrent capabilities. Commensurate with that plan, Iran is seeking to increase its stature by countering U.S. influence and expanding ties with regional actors while advocating Islamic solidarity." In short, Iran is seeking to "destabilize" the region, in the technical sense of the term used by General Petraeus. US invasion and military occupation of Iran's neighbors is "stabilization." Iran's efforts to extend its influence in neighboring countries is "destabilization," hence plainly illegitimate.

It should be noted that such revealing usage is routine. Thus the prominent foreign policy analyst James Chace, former editor of the main establishment journal Foreign Affairs, was properly using the term "stability" in its technical sense when he explained that in order to achieve "stability" in Chile it was necessary to "destabilize" the country (by overthrowing the elected Allende government and installing the Pinochet dictatorship).(4)

It is with this context, that we have the US law prohibiting U-Turn transactions, a law which HSBC, and its affiliate HSBC Middle East, violated. But not enough attention has been given to the context in which the this took place. Should the US be involved in a policy which is little more than economic warfare against Iran. It would be a shame if the focus on HSBC violations of the law led to the assumption that it is a fair and just law. Perhaps the eyes of the world should focus more strongly on American exceptionalism, where America seems able to make laws that further its own foreign policy, and not laws in the sense of justice and fairness.

(1) Senate report
(2) http://www.independent.co.uk/news/business/news/hsbc-boss-david-bagley-resigns-during-us-senate-meeting-after-money-laundering-revelations-7953320.html
(3) http://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran.txt
(4) http://www.chomsky.info/articles/20100702.htm

No comments: