Ah, we all know the claim offshore outsourcing is good for America. Seems offshore outsourcing is great for drug dealers and money launders too. Did you know offshore outsourcing enabled money laundering, flash crashes and failed projects?

The latest banking scandal of Standard Chartered laundering Iranian money is all over the news. But did you know Standard Chartered Bank offshore outsourced to India their entire compliance operations?

The DFS probe found that SCB had assured the New York state in May 2010 that it would take immediate steps to comply with the US Office of Foreign Assets Control (OFAC) sanctions. However, another regulatory examination in 2011 found continuing and significant Anti Money Laundering failures.

Among these, the bank was outsourcing its "entire OFAC compliance process for the New York branch to Chennai, India, with no evidence of any oversight or communication between the Chennai and the New York offices."

Just last week, HSBC was busted for money laundering. Did you know HSBC also offshore outsourced compliance to India?

HSBC's staff in India have come under the scanner for deficiencies in their role as "offshore reviewers" of the global banking giant's compliance to safety mechanism against money laundering and terrorist financing.

A probe by the US senate's permanent subcommittee on investigations found that HSBC's anti-money laundering (AML) compliance department, which included employees in India, was highly inadequately staffed.

Besides, deficiencies were found in the quality of the work done by HSBC's "offshore reviewers in India", who were used for clearing a major backlog of suspected transaction alerts at the bank.

More than one-third of the alerts already resolved by the Indian reviewers and others "had to be re-done" after an independent assessment by the OCC (the US office of the comptroller of the currency, which is the bank's primary federal regulator in the country).

The probe further found that an OCC visit to India in 2007 had revealed "Weak Monitoring Procedures" in the bank's internal control systems.

Knight Capital Group lost $440 million by a flawed High-frequency trading software program in the space of an hour. Did you know Knight Capital Group uses H-1B foreign guest workers for their tech? Knight Capital Groups trading catastrophe was bad software. Anyone familiar with software design knows this is an amazing boneheaded play to update software without rigorous regression testing and simulations. Here's what happened on the tech end.

It's clear that Knight's software was deployed without adequate verification. With a deadline that could not be extended, Knight had to choose between two alternatives: delaying their new system until they had a high degree of confidence in its reliability (possibly resulting in a loss of business to competitors in the interim), or deploying an incompletely verified system and hoping that any bugs would be minor. They did not choose wisely.

With a disaster of this magnitude - Knight's stock has nosedived since the incident -- there is of course a lot of post mortem analysis: what went wrong, and how can it be prevented in the future.

The first question can only be answered in detail by the Knight software developers themselves, but several general observations may be made. First, the company's verification processes were clearly insufficient. This is sometimes phrased as "not enough testing" but there is more to verification than testing; for example source code analysis by humans or by automated tools to detect potential errors and vulnerabilities. Second, the process known as hazard analysis or safety analysis in other domains was not followed. Such an analysis involves planning for "what if..." scenarios: if the software fails, what is the worst that can happen? Answering such questions could have resulted in code to perform limit checks or carry out "fail soft" procedures.

Assuredly the actual lack of software testing, verification and proper design will come out more, but currently the SEC is seemingly looking at this as a risk management issue, instead of an engineering disaster.

Guess what, the financial sector loves offshore outsourcing and importing foreign guest workers pretty much for everything except executive positions. Reuters:

Drawn by an English-speaking population and wages that can be one-fifth those in the West, more than three-quarters of global banks have a direct or third-party offshore presence in India.

Bank of America Merrill Lynch (BAC.N), Barclays (BARC.L), Goldman Sachs (GS.N), HSBC (HSBA.L), JPMorgan (JPM.N) and RBS (RBS.L) are among financial giants employing thousands in India. These wholly owned offshore operations, running around the clock, are known as "captive" centres.

Financial firms such as Citigroup (C.N), Credit Suisse (CSGN.VX) and Aviva (AV.L) are among the biggest clients of Indian IT giants such as Infosys (INFY.NS), Tata Consultancy Services (TCS.NS) and Wipro (WIPR.NS).

The New York regulator rapped Standard Chartered for "outsourcing of the entire OFAC compliance process for the New York branch to Chennai, India, with no evidence of any oversight or communication between the Chennai and the New York offices."

Wired did an in-depth piece on high frequency trading systems. The race is on, not to invest in America or American companies, but to design the ultimate rigged electronic roulette wheel, a better picosecond mousetrap.

Faster and faster turn the wheels of finance, increasing the risk that they will spin out of control, that a perturbation somewhere in the system will scale up to a global crisis in a matter of seconds. “For the first time in financial history, machines can execute trades far faster than humans can intervene,” said Andrew Haldane, a regulatory official with the Bank of England, at another recent conference. “That gap is set to widen.”

This movement has been gaining momentum for more than a decade. Human beings who make investment decisions based on their assessment of the economy and on the prospects for individual companies are retreating. Computers—acting on computer-generated market trend data and even newsfeeds, communicating only with one another—have taken up the slack. Conventional economics views all this as an unalloyed good: It is axiomatic that all trades are a net benefit to the economy because they enhance “liquidity,” the ability of investors to buy or sell assets at the best price. Indeed, in 2007 the SEC instituted an ambitious new rule, the national market system, that opened the door to dozens of new venues for stock trading, but now that transaction times are measured in micro­seconds and prices are carried out to six decimal places, those opportunities have arguably gone past a point of diminishing returns.

In other words, we have Wall Street offshore outsourcing to India, quality unknown, while creating systems which in the blink of an eye have contagion risk written right into the software.

Offshore outsourcing is routinely part of our government. We all know IBM has offshore outsourced every tech job not nailed down as well as imported thousands of foreign guest workers. That explains why the Census website is unusuable and cost $33.3 million bucks to boot.

When I wrote last month about the Census Bureau's horrible website, I got a lot of messages from other reporters and policy researchers agreeing that Census.gov makes them want to tear their hair out.

But it gets worse! Today, I learned that the new version of American FactFinder -- just one borderline-unusable section of the much larger universe of brain-melting user experiences that is Census.gov -- was developed by IBM at a cost to taxpayers of $33.3 million. Census has a website that isn't just terrible, it's also extremely expensive.

From small projects to the use of taxpayer money for offshore outsourcers like IBM, the herd behavior to labor arbitrage IT, engineers and offshore outsource continues. This is in the face of massive failures like just the few listed above.

In tough economic times, many companies slash staff and turn to outsourcing, yet that strategy may doom their products, And, in good times, as with Toyota, losing control over critical components can contribute to failure, according to study led by Lyda Bigelow, business-strategy professor in the University of Utah’s David Eccles School of Business.

Her team found that companies were more likely to fail when they outsourced components critical to their competitive position.

“Across the board, we find statistically significant increases in the failure rate for firms that don’t consider transaction costs in their outsourcing decisions,” she said. “Firms need to look beyond production costs to other costs such as poor quality, delivery delays and risk of price increases by suppliers.”

Their work shows that failure rate (either firm bankruptcy or liquidation) increased between 5 percent and 70 percent more than companies that did not outsource, depending on the risk associated with making technological changes, the product type and the company’s market share.

Now we have literally financial compliance and key critical systems being offshore outsourced, or the workers imported instead. Perhaps it's time to stop labor arbitraging the staff, demanding miracles in 30 days or less. Maybe it's time for U.S. businesses to realize how critical in-house U.S. STEM really is. U.S. professionals are not just key to the success of a business, but nowadays to the safety of the global economic system itself. Will that happen? Will America wake up and stop labor arbitraging their workforce? No. The India BPO industry and their U.S. cohorts have lobbyists crawling all over Capital Hill. Outsourcers such as IBM, Infosys market their wares to businesses and governments in an elaborate, politically connected system. This will just continue, one scandal, one failure after another with nary a nod to the fact if American workers had not been cast aside, these past, present and future disasters never would have happened.