Although banking scandals are not new problems, they are one that has gained more prominence, and wreaked more havoc in recent years. As the banking sector has grown over the last 40 years, so has the power and corruption. Over the course of 2012 alone the world saw some of largest and most destructive scandals yet. These were high profile cases involving major global banks and financial institutions whose names can be easily recognized in popular culture. These high profile organizations were involved in committing various acts of fraud, money laundering, and insider trading. If it made them money, it appears banks took part no matter who it helped or hurt. This same attitude of profits first allowed for the conditions to form that brought about the tech and housing bubbles, and eventually the financial crisis of 2008.


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Lets look at a list of major banking scandals and frauds in 2012 ALONE which speaks volumes to the scale and regularity of  such business practices within the industry

1. Libor Scandal – Bank of America, Barclays, Citi, JP Morgan.

The Libor scandal was the most important and likely most underestimated and misunderstood banking scandal we have seen in recent years. The scandal involves the manipulation and fixing of the London Interbank Lending Rate (Libor) which is the cost at which banks lend funds to each other. These rates are set daily and have a direct effect on the lending costs that banks charge to corporations, small businesses, home owners etc. By fixing and manipulating Libor major banks were able to pick and choose the cost of lending to their customers, rather than being determined by free market forces.

Outcome: Although the Libor rate was deemed to have been fixed and manipulated for the benefit of a small group, there have been little to no repercussions for banks and their employees. Investigations have been opened in London as well as the United States, but to date no companies or individuals have been held criminally responsible for the actions.

2. HSBC Money Laundering – Drug Cartels, Terrorist Organizations etc:

This year HSBC was found to have been laundering billions of dollars for major Mexican drug cartels, terrorist organizations, and rogue governments, for well over a decade. The issue came to the attention of authorities when large unaccounted for cash deposits totaling in the $10s of billions began to be discovered within the bank.

Outcome: The result of the investigation? A 1.9 billion dollar fine. Although this is one of the single largest fines to ever be handed out to a financial institution, it essentially amounts to about a month (or less) of revenues for the firm. Essentially HSBC was able to get away with financially supporting some of the most violent and brutal criminal organizations on the planet, and was punished with a fine that amounts to a bank speeding ticket.

3. JP Morgan London Whale Trade-Loss:

In May of 2012 it came to public attention that major investment banker JP Morgan had suffered investment losses in the billions of dollars. Shares of JP Morgan plummeted as a result and questions were once again raised about the risky behavior of banks and the lack of regulation to oversee these activities. Unlike other large single trading losses that have occurred in the past, the JP Morgan Whale trade losses could not be blamed on a rogue trader in some office behind the scenes. In this case the risk and losses were taken specifically by the companies Chief Investment Office, and its highest ranking employees. Total losses from the trade have been estimated at over $5 billion, plus wealth that shareholders may have lost as a result.

Outcome: Although there was much media attention brought to the issue, as the risky behavior of banks continues to be scrutinized by the public, there has been little consequence for the company or its employees. The US congress has called a subcommittee to investigate the issue, but there are no plans for criminal charges, fines, or changes to regulatory measures.

4. US Mortgage Foreclosure Fraud:

Following the height of the financial crisis many homeowners found themselves in economic hardships, suffering from difficult situations like underwater mortgages, unemployment and high debt levels. During this time one would expect banking institutions would do what they could to help people get back on their feet and get the economy moving. Unfortunately this didn’t happen. In 2012 the US government fined a number of the country’s largest banks for Mortgage foreclosure fraud. Bank of America, Wells Fargo, JP Morgan Chase, MetLife, Citi Group & PNC were ordered to pay a combined total of $8.5 billion dollars to any US home owner foreclosed on during the years 2009 and 2010 for what the government deemed to be unfair, aggressive and predatory foreclosure  practices.

Outcome: The US government required the banks to pay $8.5 billion in compensation, but no criminal charges were filed, and no restrictions were placed on the business operations of any of the involved institutions.

5. Peregrine Financial Group – $200 Million Shortfall in customer accounts:

Unfortunately the trend to steal funds from customer accounts continued in 2012 when a top executive at Peregrine Financial Group was found to have been running a $200 million ponzi scheme in which over $200 million was taken from segregated customer accounts. Despite the rise in such scams in recent years, and despite the lessons supposedly learned from Bernie Madoff it is apparent that such blatant theft can still occur within the banking system, and go undetected for decades, like in the case of Peregrine.

Outcome: Peregrine CEO Russell Wasendorf was sentenced to 50 years in prison for his part in the scheme. Despite the scale and longevity of the scheme, to date only Wasendorf has been held criminally responsible for defrauding more than 13,000 clients, and has been sentenced to 50 years in prison. The likelihood that he was the sole perpetrator is unlikely but law enforcement and government to this point have only pursued such outcomes for Russell Wasendorf. Like the Madoff outcome, very few have suffered consequences, and little to no changes have been made to the regulatory body in charge of overseeing the banking industry.

6. MF Global – Over $1 Billion missing from segregated customer accounts:

In October of 2011 after suffering sharp investment losses, investment broker MF Global declared for bankruptcy. Upon doing so it became evident that the firm had been involved in severely risky investments, and when losses were suffered company executives appear to have used over $1 billion in customer deposits to try and right the ship. Unfortunately for MF Global the plan failed, and the company lost everything, including money they had no right to access. The fight by customers to recoup their losses is still underway and the final figures of losses are still not fully known.

Outcome: Despite the fact that government investigators concluded that segregated customer funds were used, and later lost by executives, to date no criminal charges have been pursued and there are no current plans by government or law enforcement to do so.

When hearing of such corrupt, dishonest, and criminal practices of these powerful corporations an important question to ask is: is this behavior a symptom of a struggling economy, or is the struggling economy a symptom of the corrupt and immoral practice of some of the worlds wealthiest and most powerful institutions? The news stories above are perfect examples of the conflicts of interest within the investment and banking industries, and it provides insight into how our economic system has been able to deteriorate so rapidly.

Major banks and brokerages look to profit for themselves first and foremost, even if it comes at the expense of customers. This is not the way that the banking and monetary system should work. Although these examples of corruption are bad, they are not the first and wont be the last or the worst for that matter, especially if the consequences for such actions remain so meaningless.

There must be a structural change on the way international banks operate.  It has to start by tier 1 capital levels being increased; revisions in regulatory oversight; allowing banks to fail when they are run into the ground; going aggressively after executives who blatantly break the rules for purely personal benefit; and compensation plans focused more on long term success of a financial institution, not just over the previous year.  With deposit holders and investors money at risk, there must be a change in thinking on how banking is run and on how to penalize insiders……