Wednesday, December 13, 2006

Financial Crime - Staring failure in the face.

December has been a busy month for Financial Crime conferences.

No sooner has one event finished, than another is clamouring for your attention. Events you ‘…have to…’ attend, programmes you ‘…must not miss…’, workshops where you will learn ‘…how to protect yourself…’

And the lists of speakers. Chairman of this august body, President of so and so Corporation, Secretary General of that policy-making institution, Director of yet another Government Agency.

They are all there, with their speeches carefully crafted by their staff; their fulsome platitudes carefully honed to reflect the latest edition of Government policy; their timid, middle-of-the-road, ‘…on the one hand this but on the other hand that…’ response to the present statistics of fraud and financial crime; their smug acceptance that despite their almost universal lack of domain knowledge or expertise in dealing with real crime, and with one eye, carefully on the look-out for the next advisory panel post or Quango appointment, that their words will be taken as gospel;.

Please don’t misunderstand me, I am not an opponent of the conference circuit. On the contrary, I believe that sometimes, just sometimes it is possible to hear a speaker of real experience, and domain knowledge, who truly manages to make a difference and raise the level of the debate. You can usually tell these individuals because they are most often someone, man or woman, not sponsored by any government or quasi-government agency, they don’t work for the Big 4 Consultancies, they most often run their own successful businesses, have excellent websites and they don’t need to advertise. They can clearly be seen to ‘walk the talk’, and they let their experience and their knowledge do the talking.

Others, most often Government ministers or senor civil servants, clearly demonstrate their paucity of knowledge and lack of experience by their incomprehensible statements, and their criminologically-illiterate policy initiatives.

But when it comes to dealing with fraud, financial crime and money laundering, the talk circuit has become the place to be, Vance Packard was right after all, the medium has truly become the message!

Twenty years ago, I published my first book entitled ‘Fraud In The City – Too Good To Be True’.

The book set out to examine the causes of fraud and financial crime within the financial investment environment, and attempted to take a look at what ought to happen, once the UK Government’s policies for regulatory change, then grouped together under the generic title of ‘The Big Bang’, had begun to take effect.

As a fraud detective at New Scotland Yard, I had witnessed at first hand the dramatic changes that had been engineered inside the financial investment network, following the polices of the then Thatcher Government, and the drive towards financial de-regulation.

My colleagues and I had watched, helplessly, as a tidal wave of fraudsters, con-men, financial snake-oil salesmen, and assorted ne’er do wells, all masquerading under the title of ‘financial advisors’, washed up on the shores of the City of London.

They brought with them a wide range of tactics and techniques, some clever, some not so clever, some downright dumb, but all designed to part the unwitting investor from his cash as quickly, and as efficiently as possible.

We monitored them while they routinely trooped in and out of a small group of solicitor’s offices, on their way to a few chosen accounting practices, stopping off on the way to buy a collection of carefully prepared, off the shelf companies, provided by a select team of company formation agents, who could also help them with access to prestige address, fully serviced offices in the City of London or the West End.

Get off the plane at Heathrow at 10.00am and you could be in business at 3.00pm, and many were, complete with letter-heads, invoices, telephone and fax communications and a sweet-voiced girl answering a bank of phones with your own company’s number!

In the 1980’s London became the fraud capital of Europe!

We told our management about them, but most of them were men who had spent their early police careers dealing with an altogether different kind of fraud, (long-firm fraud, carbon-paper fraud, telephone directory fraud, etc, etc, almost entirely unheard of today), and who didn’t really want to understand that the financial and political environment had changed. To do so would have meant getting out of a comfort zone which didn’t really require very much effort to get through the working day, and would have meant learning a whole range of new tricks.

No, far safer to stick to tried and trusted methods of inertia and bad practice, and report the matter to the Department of Trade and Industry, who might, if they could be bothered, get round to investigating the company some day, for the offence of fraudulent trading. So bad did the reputation of the Investigations Branch of the DTI become that they became universally known as the Department of Timidity and Incompetence.

We did have meetings with the DTI, to see if we could engineer change and introduce some motivation within their midst, but we were told that there was really little they could do, and anyway, the new regime of financial regulation would pave the way for a brand new, bright tomorrow, in which such criminal actors would receive their just deserts.

All the time, German, Swiss, Italian, Dutch, American and British con-men, cemented their hold over the OTC share-traded market, and the British investor lost his shirt, along with foreign investors who had been inveigled to put money into Britain’s booming new investment environment.

We begged the Director of Public Prosecutions for help. We urged him to give us the right to arrest and charge for theft and false accounting in carefully selected cases. To one DPP’s perpetual shame, he responded, ‘…Why should the British tax-payer be concerned if a load of Germans are ripping off another load of Germans, is it really our business…’ When we pointed out that these criminals were successfully sending a series of hugely damaging messages about the British market, he shrugged his shoulders, and said it really wasn’t his problem.

So, we went out and arrested them anyway. We didn’t ask for permission from our management, because we knew it wouldn’t be forthcoming. We didn’t ask for permission from the DTI because we knew we would never get a response. We didn’t ask the DPP before charging those we nicked, we just did our job in the same way as if we had chanced upon a gang of bank robbers or lorry hi-jackers.

When we interviewed them, they glibly told us that the reason they came to London to run their rip-off companies was because they knew that the British prosecutors would not go after them. This time the DPP was shamed into charging them, and eventually, after a long trial they were convicted and imprisoned, the trial judge expressing his great concern that such cases could be going unpunished in the London market.

But it was a Phyrric victory, because after that case, we were forbidden to act in the same way again, and instructed that all such cases should be referred to the DTI and the DPP in future before any action was taken.

Later, we watched impotently as the findings of the Roskill Commission on Fraud Trials were re-engineered by the lawyers and civil servants in the Attorney General’s Office and other Government law departments, and emerged as the Serious Fraud Office (SFO), which proceeded successfully to downgrade the role of the detectives and promote the role of the civilians, so that now, fraud investigations and trials were run by people with no knowledge of criminal behaviour whatsoever, while the detectives were kept in a separate part of the building, and not allowed to undertake their traditional roles in the management of fraud investigations.

Perhaps not surprisingly, the conviction figures plummeted and the public rapidly lost confidence in the Government’s ability to manage the problem.

The Financial Services Act introduced a regime of regulatory overkill, which put more and more powers into the hands of a wide range of untried and untested civilians, and loaded the financial sector with rule books and regulatory dictat, but failed to truly provide the atmosphere necessary to enable entrepreneurial financial business to flourish, while really keeping the bad guys out of the business. Scandal followed scandal, and the poor old investor continued to lose money.

So bad did the problem become that when the Government was finally forced to throw in the towel and admit that the private occupational pensions market had become a scandal of overwhelming proportions, they had to find a new phrase to define the problem. Wary of calling it institutionalized fraud, which is what it was, they chose to call it ‘mis-selling’, a phrase which carried no stigma for the government’s inability to protect investors, and introduced a hitherto-unheard of concept to British criminal jurisprudence.

Money laundering became the next big shibboleth, and we were told that by adopting a dubious US concept of ‘following the money’, we would finally strike at the heart of the criminal enterprise. Directives, regulations, and proposals for legislation poured from the inexhaustible source of the EU Commission. More and more rule books were written and introduced.

A small number of advisory practices emerged, desperately trying to bring some judgement and order into the madness, trying to share wisdom and sense in what was rapidly becoming a regulatory free-for-all. To them, we must be eternally grateful, because they stood like small beams of light in a very dark world indeed. But still the regulatory monster grew and grew, and more and more unqualified people emerged from the shadows to hold down posts of significant importance. The conference circuit boomed, the talk shops proliferated. If you needed to find a senior policeman urgently, it was pointless ringing Scotland Yard or Wood Street. They were all busily talking to PowerPoint slides in smart London hotels!

Major new agencies were headed up by those who had never before investigated so much as a shoplifting case, and those who knew better, but who had the temerity to say so, stood by, while others, who talked the arcane language of the New Labour regime, were preferred, in place of men and women of real, hands on, practical experience.

The market for Fraud and Financial crime is alive and well, and making a great deal of money. Every year the problem gets bigger and bigger, and the big consultancies charge bigger and bigger fees to tell inexperienced management what they ought to know, if they were any good at their jobs.

Last week, a senior manager at a major Big 4 firm told me that his firm would not look at any consulting project unless there was a minimum of ₤1 million in fees on the table. They wanted to hire a financial crime expert, but when asked to define his role I was told that all they really wanted was someone who had just been in a financial crime role in a major bank, and could tell them what policy his former employer was intending to undertake to meet the requirements of the risk-based approach to financial crime management. This information, I was told was priceless, because it would enable the consultancy to re-package the product and sell it again and again to the other major banks, who, in the race to the bottom to minimize their outlay on even more regulatory spending, do not want to spend a penny more or a penny less than their competitors.

It could be said that the market which surrounds the financial crime issue has now become too big to permit an answer to the financial crime conundrum, to be advanced. Too many peripheral businesses depend upon the crime figures growing in a nice exponential curve, simply to justify their continued existence.

There are ways in which these problems can be dealt with. There are solutions, and there are some answers. It will need a very brave financial crime manager to address these responses head on, because a lot of the answers are in reality, very mundane, and rather simple, but they work.

Sprinkling pixie dust on the lap-tops is not going to produce a new generation of IT-driven financial crime solutions. Spending millions of pounds on change-management procedures will not provide an answer.

In order to begin to provide answers, you need to provide education and training for staff so that they really do begin to understand the problem. To achieve this, you need to talk to people who understand how the criminals’ minds work, and how they will behave in all the circumstances. You need to talk to men and women who have spent their careers dealing with professional criminals, and who know what motivates them and what does not.

We have to be willing to stand up to ministers and their juvenile advisers, with their promises of a new Jerusalem, and show them that their latest initiatives for tackling crime, while very headline grabbing, are just not going to work. We have to make them see that sometimes, blue-sky thinking, is just that, standing and looking at an empty horizon.

When Sir Charles Rowan and Sir Richard Mayne first developed the Metroplitan police on the instructions of Sir Robert Peel, they defined the concept which became the bedrock of policing policy in any country which subscribes to the theory of policing by consent. They understood that the biggest disincentive to crime is the likelihood of getting caught. That was as true in 1829 as it is today, nothing has changed. We won’t prevent any more crime by taking the proceeds away from criminals, we will just guarantee more crimes being committed. Think about it!

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