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Viewpoint: Uncle Sam’s Stronger Arm

| 23/02/2015 | 8 Comments

Commentary by 101: For years those with an inkling of interest in how the global monetary system works have bemoaned the fact that the US wields far too much power because it is the clearing house for US dollars. Banks from all corners of the world have accounts at US correspondent banks so they can move Uncle Sam’s paper globally on behalf of millions of clients.

Over the past 15 years it has become increasingly difficult for some smaller banks outside the US to operate. The risk management departments of the US-based banks have all but closed the door on offshore-based banks trying to secure or maintain accounts with a US correspondent bank.

This situation increases the power of US regulatory authorities significantly: All that has been required is for a US regulatory body to suspect wrongdoing and secure a freeze order from the US courts over the US assets of any bank using America’s banking system.

That freeze has a very powerful effect on both US-based banks as well as those based elsewhere.

The mechanics of this strategy is simple: With as little evidence as the judge will allow on the day, the US regulatory body places a freeze (or threatens one). The bank in question cannot withstand such a freeze so inevitably they negotiate and settle with the US regulatory body. They pay a fine (usually a very large one) and carry on with business the next day.

The power that US regulatory bodies have has resulted in a ”shoot first, ask questions later” approach by these regulators. The reputational impact of a publicly announced freeze on assets plus the squeeze it places on a bank’s liquidity are crippling. Clients will panic at the very announcement of such action. And within a matter of days an allegation, not proof of wrongdoing, can lead to a bank being closed down with anywhere from 10 to hundreds of persons becoming unemployed.

The challenge for many offshore-based banks is that they rarely have balance sheets with the size that allows the bigger banks to play this ‘game’. Indeed, some of the recent fines imposed on major banks in the US are larger than the entire deposit base of some banks in offshore centres. These smaller banks cannot withstand the run on their deposits due to such action, or afford the very sizable fines or settlements that might be negotiated with the US regulatory body.

For years hedge funds, and to a lesser extent insurance companies, have been the victims of this ‘freeze first, carry out a proper investigation later‘ strategy. But now we must seriously question the sustainability of offshore-based institutions if this strategy can be deployed so easily as an alternative means of stifling the offshore banking system.

This isn’t a conspiracy theory. It’s an important policy challenge for governments in offshore centers to ponder. Just look around for evidence of the damage that a mere allegation can cause.

Uncle Sam no longer needs to over rely on FATCA, Tax Information Exchange Agreements or rhetoric from American politicians. All he needs is an allegation, a willing judge, and an overzealous regulator.


Category: Business Viewpoint, Finance, Financial Crime

Comments (8)

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  1. Anonymous says:

    The key here is to realize these are “Allegations” made by the SEC. Allegations which are used to ruin business by destroy reputations, before any wrong-doing is even proven. This is extortion by all counts. When the SEC looses cases they don’t apologize for ruined lives and business. The SEC is just another stronghold tool used by US government.

    • FaJesus says:

      There are “Allegations” and there are “Allegations”. An opinion can be formed when reading the Allegations.

  2. Anonymous says:

    Well said!

  3. Anonymous says:

    This excellent viewpoint hits the nail on the head. There is not much we can do about this external influence and we may see more of this going forward.

  4. FaHeysus says:

    All true. The extraterritorial stuff is just an expression of the American Empire. The question can be asked who’s empire would you want to live under if not theirs. Do you advocate a rival global currency existing or a new one?

    • Anonymous says:

      It is possible that our current fiat currency ponzi scheme will come unraveled like every other time in history that governments intervene or control the currency. Should that happen you may have little choice.

  5. Anonymous says:

    A sensible and knowledgeable contribution – this would be the dilemma face by Caledonian, and lacking home support there was only one route open to them…

    • Anonymous says:

      Securities fraud will get your assets frozen anywhere in the developed world. Offshore banks are accustomed to zero local oversight and tend to step in it when their dealings take them to places where the law is enforced.

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