Juan Pablo Guzmán smooths the creases on his shirt. The 46-year-old father of two is making his monthly visit to the HSBC bank branch in Alhambra, a predominantly Latino neighborhood in East Los Angeles.
Wearing a light corduroy jacket, he brushes over the bulge in his inner jacket pocket, a brown envelope filled with hundred-dollar bills — payment for the garments which his company exports in bulk to Mexico. Guzmán has made the trip to the HSBC in Alhambra dozens of times, but today’s visit will be different.
Unbeknownst to Guzmán, FBI and DEA agents are lying in wait as he makes his way through the glass doors of the bank.
As soon as he starts the cash deposit process, federal agents swarm around him, weapons drawn. Guzmán puts up little resistance, but acts shocked by his arrest.
While Guzmán may on the surface appear to be just another Mexican garment exporter working out of L.A.’s fashion district, selling used clothing in bulk for cash to Mexico, his company is really a front for laundering millions of dollars for his distant cousin Joaquín Guzmán — better known as “El Chapo” — the former head of the Mexican Sinaloa drug cartel.
A bit player in a much larger and complex ecosystem which launders money for El Chapo, Guzmán’s arrest is simply considered the “cost of doing business.”
As billions of dollars of illicit flow from Mexico to the United States, the proceeds from the of those needs to find entry into the U.S. banking system in order to grease the wheels of drug cartels.
And while banks aren’t willing to do business with firms, it would appear that they are all too happy to deal with drug lords.
Your Cryptocurrency’s No Good Here
Despite attracting billions of dollars of investment from institutions such as sovereign wealth funds, banks such as HSBC () routinely refuse banking services to legitimate firms.
But while it may be convenient to argue that banks just don’t want to do business with firms because of the latter’s association with illicit activities — from the online marketplace Silk Road — an e-commerce site for anything from weapons to — to Russian intelligence hacking offenses related to the 2016 U.S. presidential campaign — the real reasons for banks to serve firms may be far more obvious — it’s just not worth their while.
Just as El Chapo expected to lose some money during the laundering process — the cost of doing business — banks also factor in margins for their transactions — costs which they expect to incur from regulatory fines — and calculate their margins accordingly.
With firms, the profits from transactions simply do not justify the costs for banks to serve them. And though legitimate uses for have mushroomed in the past few years, it’s simply easier for banks to maintain a blanket ban.
According to Sam Bankman-Fried, CEO of Alameda Research, a digital assets firm out of Berkeley, California,
“It’s not illegal for big banks to bank the crypto industry, but it’s a massive compliance headache that they don’t want to put the resources in to solve.”
And because banks are unwilling to serve firms, many are being forced to use alternative means to manage their day-to-day operations, some bordering on the criminal.
Cornered into Criminality
In January, the CEO of Kraken, one of the oldest exchanges took to Twitter, lamenting that he “basically had to employ the arts of a money launderer to survive” after both JPMorgan Chase and Bank of America closed the exchange’s payroll accounts on short notice.
And Kraken is not alone.
Other firms have abandoned the banking system altogether, paying their employees in , including stablecoins like Tether and USDC.
Yet the irony is that was intended to circumvent the banking system, not supplement it.
The idea behind was to remove trusted intermediaries and the centralization of finance.
But because has not taken off and since costs associated with running a company are still strongly based in fiat currencies, many companies have no choice but to rely on the traditional financial system.
Even licensed and regulated hedge funds have struggled with getting bank accounts.
Last July, a hedge fund manager who was in the final stages of opening a bank account with a large Swiss private bank had the bank pull the plug on the account at the very last minute. According to the manager,
“We were literally a day away from getting our account number, when one of the board members informed our account manager that if they opened our account, their New York correspondent bank would cut all banking relationships with them.”
That threat alone was enough to kill any prospect of the Swiss bank opening an account for the fund.
Because U.S. regulations governing are virtually non-existent (except by extension of existing laws) and enforcement from federal regulators has been piecemeal at best, many U.S. banks see firms as ticking regulatory time bombs.
And since two-thirds of the world’s international transfers are denominated in dollars and funneled through banks in New York City, the threat of having such banking relationships severed is simply too big a risk for any bank to bear.
But one U.S. bank has bucked that trend and embraced firms. Silvergate Bank, a tiny community bank headquartered out of San Diego, California has been serving firms for several years now.
Silvergate, which started off with well under US$1 billion in assets before accepting clients, now claims as much as US$40 billion in deposits according to initial public offering documents filed last November.
Even as regulators across the world have been imposing new regulations on businesses, subjecting them to tougher standards for derivative products and introducing new licensing regimes, banks are still sitting on the sidelines when it comes to providing banking services to the nascent sector.
It’s Not That We Won’t Take Your Money, But Do You Have More?
And while banks will argue that the main factor is cost — it is estimated that combating money laundering is a compliance task that banks pay as much as US$25 billion a year for — according to some bank insiders, the reality is that there just isn’t money to be made by servicing clients.
Anti-money laundering laws typically require financial institutions to know the identity and aims of their clients as well as the source of funds. Yet recent history seems to suggest that banks pay lip service to their compliance duties at best.
From laundering money for drug cartels to facilitating transactions with United Nations-sanctioned countries, banking for Iran and North Korea and everything in between, banks have proven time and time again that they are more than willing to look the other way where there’s money and fees to be made.
According to one former banker,
“The market cap for is too small. Even if there’s no money laundering, there’s no money to be made either.”
“But the day that drug cartels start using en masse, that might be a different story. You might see the banks all signing up all of a sudden.”
The irony is that banks may not be willing to service firms not because is used for money laundering, but rather because it is rarely used for money laundering.
But denying firms basic banking services is short-sighted and it impedes sector growth.
If regulators are serious about preventing money laundering, then banks’ denial of providing firms with even the most basic banking services is counter-intuitive and counter-productive.
Quite apart from preventing money laundering, forcing firms out of the financial system will force more firms to go underground or get overly creative with solving their banking issues.
Published at Sat, 09 Mar 2019 07:33:04 +0000
