Pop quiz time. Which U.S.-based financial services firm used the U.K. to make losing trades that caused embarrassment, regulatory scrutiny and much worse: MF Global, AIG, Lehman Brothers, or JPMorgan?

Answer: All of the above.  

JPMorgan Chase's chief investment office was set up bi-nationally, with traders in the U.S. and the U.K. It looks like that was the only smart thing Jamie Dimon did here. This business unit put on huge positions in credit derivatives that were rationalized as a "portfolio hedge" but grew unmanageable under minimal supervision and lax controls. The bank's risk appetite grew out of sight of U.S. regulators and out of the mind of U.K. watchdogs.

AIG's Financial Products Group, a PricewaterhouseCoopers audit client along with JPMorgan, made the bets on credit derivatives that caused the insurance company's own liquidity choking fit (and takeover by the U.S. Treasury) in London, too.

Lehman Brothers' Repo 105 transactions, used to window-dress the balance sheet each quarter, began with an exchange of $105 of collateral for a $100 loan. Because the repo was structured with excess collateral, Lehman could call it a "sale" and, therefore, did not record the loan on its books. The excess collateral was a necessary condition for treating the transaction as a "sale" but not a sufficient condition for any U.S. law firm to bless it. Lehman went to the U.K. to get a "true sale" legal opinion.

A U.K. legal opinion in 2009 revealed that Lehman's local management team had also failed to segregate "vast sums" of client money "on a truly spectacular scale." After Lehman went bankrupt, this commingling sadly reduced clients' claims to the status of unsecured creditors.

When Jon Corzine decided to use repo-to-maturity trades to juice corporate profits, MF Global's subsidiary in the U.K made it happen, for a cut of the action. The risky bets instead caused what MF Global bankruptcy trustee James Giddens called "liquidity asphyxiation" in his June 4 investigation report. Large sums were needed every day to fund the margin calls on the European sovereign debt behind the trades, debt that was rapidly losing value. MF Global allegedly funded the margin calls by re-characterizing customer assets as house assets.

The illegal act of commingling customer funds with company money had already been committed in London by MF Global's main bank, JPMorgan, and by another bank, Barclays. PwC, the auditor of all three firms – MF Global, JPMorgan and Barclay – had neglected to catch them doing it for several years. The banks and the auditor were fined recently for the lapses. Yet PwC and regulators on either side of the Atlantic missed the red flags when MF Global seemed to be breaking the same laws all over again.

As a result, MF Global customers are also waiting more than seven months for the return of some of their funds from the U.K., where they were allegedly used to fund Corzine's unsuccessful outsized bet to return the firm to profitability.

It's not clear if the Dodd-Frank Act's Volcker rule, intended to restrict proprietary trading and hedge fund-like activities for deposit-taking institutions, will apply to overseas affiliates of American banks. We need stronger cross-border regulatory enforcement and U.K. cooperation with U.S. regulators to spot U.S firms going to London for looser rules.

It looks like we have regulatory capture instead: Margaret Cole, the U.K. regulator at the Financial Services Authority who presided over the fines for commingling customer funds at JP Morgan, Barclays and PwC, is now general counsel for PwC U.K.

Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.