When banks slip

Correspondent banking is a sort of plumbing that allows global trade to move without getting stuck in payment problems. Yet,it is the alleged misuse of the correspondent banking relationship by HSBC that has come under the glare of the US Senate,and rightly so. The bank had put too few people to police anti-money laundering regulations in its business,sometimes even outsourcing them. As a result,when it chased correspondent banking business with some banks in Saudi Arabia,Bangladesh and other countries, the red flag was either not raised or ignored. That a bank with global assets of over $2.3 trillion can do this shows the extent to which ducking of norms has clouded the financial sector to earn profit in difficult times. In conjunction with the allegations against Barclays and others of trying to tamper with the London Interbank Offered Rate (Libor),now spreading to other markets like Korea,the financial sector will take time to clean up its act.

The probes throw up critical issues for the world economy. They have to do with the financing of global trade. Under the present model,correspondent banking ensures that banks,like those in India,provide financial support for Indian companies when they trade abroad. If an Indian firm trades with a company in Peru,for instance,chances are there will be no Indian banks operating from there. The settlement of the bills of exchange and other papers will be done through the offices of correspondent banks. In bigger markets like China too,the presence of Indian banks is nominal. So they can also commit such mischief unless anti-money laundering regulations are implemented diligently.

But here is the problem. In India,anti-money laundering charges are supposed to be investigated by the Enforcement Directorate with inputs from agencies like the Intelligence Bureau and the Financial Intelligence Unit. Yet there are no institutional mechanisms for the sharing of data between these units and even less with those outside,like the RBI. That is why there are celebrated arrests in India but rare,if any,successful prosecutions even in open-and-shut cases like the Satyam fraud. The final word on the 2G allocation cases,of course,is a long way off.