Banking: be afraid...

It's ten days since the US government announced that it was examining the alleged involvement of The Bank of China and Banko Delta Asia in transactions involving North Korea.

When Nigel Morris-Cotterill, head of The Anti Money Laundering Network an international consultancy and services provider for financial institutions and governments (and, incidentally, CEO of our parent company) warned bankers of the extra-territorial power of the USA PATRIOT Act, the act had been passed only a matter of a few days. His warnings were largely discounted as others said that the warnings were excessive.

Morris-Cotterill was right: the USA has effectively killed international trade between Myanmar and all markets of any size, gleefully proclaiming its policy of blocking Myanmar banking transactions, and the application of other sanctions a success because businesses, including indigenous Myanmar businesses have moved out of the country. If making a poor country even more poverty stricken is success, then the US has been successful in its efforts. But if it's regime change, it's really not achieving very much.

Now the USA is having problems with its WTO commitments relating to textiles. It's no surprise that the USA will be looking for some way to put pressure on China. And the USA has a subtext - it wants to force a pace of change to the Chinese financial industry.

And it needs leverage. So an issue that it's been keeping in the cupboard for several years has suddenly been dusted off and used: it's the relationship between China and North Korea.

The USA should realise something: it's isolated in relation to its stance regarding North Korea. Whilst some countries do apply limited sanctions relating to arms and dual use products, there are no blanket sanctions applied other than by the USA.

The USA has not taken formal action against the Bank of China: to do so would be an attack on a state-owned institution and would without doubt harden the resolve of the Chinese who have just had one run in with Europe over textiles and would rather not have another with the US just yet. The US hopes that the Europeans have softened up the Chinese enough so that they allow the US to get much of its way - but a bit more arm-twisting from another quarter won't go amiss, the US reckons.

It is probably no coincidence that the USA began this campaign just as the Europeans sorted out their differences on the garment trade, and just before the USA has to do the same. The CIA has monitored Macau for connections with North Korea for some time, and it has made special focus on a bank owned by Stanley Au, a Meccanese legislator, through a Hong Kong holding company. The bank has done business with the North Korean government since the 1970s.

There have been CIA planted stories about drugs and arms deals for much of that time but nothing has come of them. But to try to divert the Chinese during trade negotiations by creating what amounts to a diplomatic row over China's foreign policy is not going to help, despite what the Americans think.

The USA takes pot-shots at China trade with increasing frequency with accusations of dumping (often rejected but with somewhat less media coverage than the initial accusations) and with regard to the rate at which the yuan is fixed vis-a-vis the USD.

What the US really wants is to get China to agree to substantially revise the exchange rate, to open up its banking sector to ownership by US banks (it's not happy that UK banks HSBC and Standard Chartered have a significant lead, and that UK bank Royal Bank of Scotland has taken a substantial stake in Bank of China).

The fact is that being belligerent is not actually the way forward. Chinese airlines are buying Airbus and leaving Boeing on the shelf, in more ways than one; European car manufacturers are having significantly more success than US owned companies; US money is being taken in but very limited control is being given for it.

Worse, the move may cause problems at home for Macau is home to several new US owned casino developments which really cannot afford to have problems with their banking relationships. Whilst none of them are likely to be directly affected by the action taken against Banko Delta Asia, the effect will be to raise the profile of Macau as a whole but for all the wrong reasons. And that is likely to cause difficulties in their own banking relationships at home - for the USA PATRIOT Act can also be extended to apply to their accounts outside the USA.

For customers of Banko Delta Asia, the primary worry is whether the bank will be able to repay deposits. It's ironic that on the weekend when the US news started a run on the bank that the Chinese leadership was sponsoring a conference in Beijing on the creation of a deposit guarantee scheme to be funded by the banks by insurance rather than by the state.

In Hong Kong and Macau, regulators are trying to deal with the aftermath of the announcement which was made on Thursday in the US, after close of banking in both HK and Macau. The Hong Kong Monetary Authority has appointed a temporary manager to the HK subsidiary of the Macau bank - but so far has taken no action in relation to the HK registered holding company.

For the Macau bank, one thing should be a focus - there is nothing of any significance which is new and which was not already in the public domain. The exercise of power must be done fairly and appropriately. It is at least arguable that the actions taken last week were neither and that, therefore, they are open to constitutional challenge in the USA. How far that challenge would get is another matter and there is little doubt that one reason that the Act is used against small institutions is that they cannot afford to throw all out litigation at the US government in a US court, and that whatever happens the case will not be finished until the Supreme Court hears the final appeal in about six to seven years.

For bankers and regulators all over the world, the action makes it clear that the USA PATRIOT Act does have the muscle that Morris-Cotterill explained almost four years ago; and that it is prepared to use it. Equally importantly, it shows that it is prepared to use it for political purposes not merely because information comes into its hands.

The USA PATRIOT Act can be used against any country, organisation, corporate structure or individual who wishes to deal in US currency.

The Anti Money Laundering Network