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Morning Line: British banks continue to 'trade with the enemy'

Barclays is the latest bank to face a multi-million dollar fine for breaching the complex net of financial sanctions.

 

Barclays is the latest bank to face a multi-million dollar fine for breaching the complex net of financial sanctions.

On the face of it, Barclays had a simple choice: do business with the US, the world’s largest economy, or seek to make a profit from Cuba, Iran, Libya, Sudan and Burma – all countries subject to US sanctions.

The British bank got this choice wrong for over a decade and now it must pay $298 million (£190 million) to the US authorities. It is accused of handling hundreds of millions of dollars in clandestine transactions with banks in the five countries between March 1995 and September 2006 during which the bank allegedly removed details from payments to hide the origin of the countries. The bank was charged with violating the International Emergency Powers Act and another count of ‘trading with the enemy’.

Barclays joins Lloyds TSB, which agreed to pay $350 million after accepting deposits from Iranian and Sudanese banks that were banned from interfacing with the US financial system. In a process referred to internally as ‘stripping’, Lloyds employees removed customer details from payments so that wire transfers would pass undetected. ABN AMRO, Credit Suisse and UBS have all been hit with fines for violating US sanctions.

This seems a stunning string of violations for institutions that employ vast armies of staff solely for the purpose of ensuring they comply with the rules and regulations.

In fact the UK regulator, the Financial Services Authority, has found inadequacies across all sizes of financial firms in their abilities to reduce the risk of breaching the many sanctions imposed on countries or individuals around the world. It too has hit out at firms violating sanctions, with RBS its biggest catch in the regulator's fight against financial crime earlier this month.

Businesses face a complex challenge in complying with different sanctions. There are conflicting obligations under US and UK law, for example. These obligations can then also interfere with other legal obligations. The US is increasingly imposing ‘extra-territorial’ sanctions which essentially impose requirements on non-US companies operating in third countries outside the US.

The array of rules is such that even those without a US presence face considerable risks for ignoring US sanctions. Take the example given in a Chatham House discussion of a foreign subsidiary of a US company. It acquired a European subsidiary which in turn had a Mexican subsidiary which was doing business with Cuba. The company had conflicting obligations under EU law and US law. The US authorities threatened to impose heavy fines, so the subsidiary was sold.

UN sanctions – which are not implemented uniformly by in all states – muddy the water further and have led to disagreements between the UK and US.

The confusion does not excuse the banks, which complain that policy makers do not do enough to take into account the practical and regulatory costs they face to apply new measures. Sanctions are not a new challenge after all. Since the end of the Cold War they have been used much more frequently as a tool of international diplomacy. Their use again increased in the fight against terrorism, despite continuing debate about their effectiveness.

Sanctions are systematically undermined, not just by companies, but also countries. Where the US and EU have sought to halt Iran's nuclear programme with sanctions, China, Russia, India and Turkey have moved in to make a profit.

A 2007 parliamentary report summed up the widespread criticism of economic sanctions as a tool to enforce countries to make major policy changes when it concluded that ‘even when combined effectively with other foreign policy instruments, sanctions usually play a subordinate role. They may even be counterproductive when a target regime responds by increasing its internal control over resources.’

The banks of course don’t have the leisure of being able to sidestep financial sanctions, inadequate or not. The fines are at best embarrassing and damaging to the reputation of the likes of Barclays and Lloyds, at worst a sign that they are bankrolling brutal regimes and view themselves as above the law.

7 comments so far. Why not have your say?

Raymond Hurley

Aug 17, 2010 at 13:05

Cuba is not a brutal regime.

Cuba has a health system, and a child mortality rate that most people in America would envy, were they able to make a comparison with the USA. Americans however, are subjected to the constant propaganda of the US media,and American politicians.

The record of the USA in Central & South America is a disgrace.

The USA should stop meddling in the affairs of others,and concentrate on improving the life chances of it's own citizens.

Most of the US population, have a standard of living lower than Western Europe,and and many tens of millions have a standard of living comparable only with third world countries.

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Richard S

Aug 17, 2010 at 13:46

Oliver North was an American hero for sanctions busting. Barclays is a British villain. Nuff said?

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Old git

Aug 17, 2010 at 13:53

America has arbitary rules to suit its own short term political viewpoint.

We the UK respond by saying how far do you want me to bend over.

We bow and grovel to America and help fight their wars.

They support brutal and oppressive regimes in the Middle East and the Caucases because it suits their geopolitical need to dominate oil and trade.

China has no qualms about dealing with and trading with with these countries and I don't see America doing anything about it,they prefer to punish their supine "allies".

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Colin Newbury

Aug 17, 2010 at 16:30

As always one rule for them (USA) and another for all the rest. They are the only country that thinks it can, and does, implement it's laws regardless of where the actions take place. I am looking forward to when China overtakes the USA as the largest and most important economy in the world and we all can stop these bully-boys inflicting their predudices on the rest of us.

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Jeremy Bosk

Aug 17, 2010 at 17:03

America is a bigger menace to civilisation than all the Islamic nut cases, drug dealers and gangsters on the planet. British politicians are too subservient to Uncle Sam. To regain some measure of independence we should more closely ally ourselves with the EU. On our own we have very little influence.

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Keith Dillingham

Aug 18, 2010 at 11:57

Well said Jeremy, if perhaps a tadge overstated. Thought I'd add support as any suggestion of working with the EU tends to attract flak.

The USA is still the number one economic and political power and the UK shares a great deal of common interests. But too often the attitudes of our political and business leaders contain an ingrained subservience, as illustrated by Cameron's remarks in the USA recently and Hague's talk of special relationship.

Regarding the EU, we didn't join out of any love of the EU; we joined out of necessity. Yes they're a group of squabbling countries, generally seeking their own self interest. But if you listened to critics of the EU then you would think it has been a failure. It hasn't; it's been a success. Perhaps that will become a bit more apparent when the Euro passes parity with the pound in the coming years. What we've failed to do is learn to work with and fit into the EU properly. Our position has been a bit like being forced to join an expensive club out of necessity then sitting on the sidelines and complaining about the rules. Unfortunately, criticism of the EU and foreigners in general goes down well with the public at large, so I cannot see our politicians reforming their views any time soon.

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Anonymous 1 needed this 'off the record'

Aug 21, 2010 at 12:26

$298 million - They must be joking. Why should Barclays bank accede to this blackmail? If the United Nations Security Council had unanimously approved explicit sanctions against a named country and accompanied them with a written remit then there might be some basis for penalties, but this is unilateral blackmail, pure and simple from a government that has committed repeated breaches of international law and stands in breach of its UN charta treaty obligations and which refused to recognize the ICJ after it made a ruling imposing $320 million damages against it for unlawfully mining Nicaraguan harbours. This is bare faced hypocrisy and outright extortion.

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