Beyond the charter

Given the widespread Indian bias against foreign businesses it could be easy to draw the wrong lessons from the damning indictment of Sta...

Given the widespread Indian bias against foreign businesses it could be easy to draw the wrong lessons from the damning indictment of Standard Chartered Bank by Special Court judge Justice Variava. There are lessons here indeed, but the mood in the wake of the courtacirc;euro;trade;s finding should be celebratory not downcast. It is that lax as the system may be, it does have its own mechanism to catch wrongdoing in the end, and the reckless should beware.

It would be easy to point to Stanchartacirc;euro;trade;s appalling behaviour, outlined in detail by Justice Variava, to reiterate a point that xenophobes and lobbyists are only too anxious to make: foreign businesses, banks, whatever, are given to unscrupulous behaviour in developing countries that they would not dream of indulging in in their home countries, knowing that the penalty there would be severe. Well, yes and no.

Some MNCs behave badly in some developing countries when they would not dream of doing so in their well-regulated home countries because in one bad behaviour and poor regulation may be the norm and in the other it may not. Businesses are apt to try to maximise profits, a legitimate activity. A rewarding way to do that in societies where no penalties, or negligible penalties, attach to illegal behaviour can be to cut corners if not indulge in outright illegality.

This propensity can be accentuated where such breaking the law is the rule rather than the exception, so that the law-abiding clearly stand to lose. The story of personal tax behaviour in India is a cautionary tale.

People dodge taxes because severe punishment does not apply. Those who do pay them then become aggrieved by the patent unfairness of the system. This is periodically reinforced when amnesty schemes reward dodgers with lower tax rates to convert their black money into white. A vicious circle ensues.

The point to appreciate is that differing behaviour across countries by the same institutions, businesses, etc, has nothing to do with the nature of the businesses and everything to do with the environment in which they operate. Thus it is not just that foreign businesses and financial outfits may have greater incentive to behave dishonestly in developing countries with half-baked regulatory regimes.

Developing-country firms conversely will have greater incentive to act within the bounds of the law in a country where regulation exists more than in name.

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The message of the securities scam was the appalling state of regulation in India, tempting banks to cut corners. The thing to cheer about in Justice Variavaacirc;euro;trade;s ringing indictment of Stanchart is that it sends out the message that India is no banana republic, and wrongdoing will have consequences.

That the bank in question is a foreign bank is both incidental and significant in different ways. It is incidental in the sense outlined above: the fundamental fact was that the environment needed fixing. It is significant in the sense that foreign banks who thought the rules of the game differed in emerging markets from developed ones and a little bending of them was all right should now have pause.