Why the UK continues to be the Fraud and Money Laundering Capital of the world!

This introductory blog is designed to set the scene for a series of articles I intend to publish which will examine some of the cases with which I was engaged as a Scotland Yard Fraud Squad Detective, and later as a financial regulator, a City lawyer, a consultant in the IT industry, and later as a self-employed financial compliance adviser. In this introduction, I shall try to explain what I mean by the criminogenic environment, to define why the propensity to commit financial crime is so prevalent in the financial sector, and why there is so little distinction between what the banks do and what organised crime does. I like the new phrase 'banksters' and I shall continue to adopt it where relevant.

The intention of these chapters, which I hope can be subsequently published as a series, is to set out my experiences in the roles I have filled, and to demonstrate how the financial centre we refer to more generally as 'The City', is a criminogenic environment, filled with people whose entire focus in life is on the making of vast sums of money, with no other edifying features whatsoever. It is a huge casino which welcomes players to come and gamble at its tables. The only problem is that these tables are crooked, the cards are marked, the dice are loaded and the croupiers are dishonest.

The word 'criminogenic' means "...Producing or tending to produce crime or criminality..." A more complex definition puts it as follows; "...Relating to characteristics or factors identified as predictors of crime and/or related recidivism..."

It should not be taken to mean that the City is full of crooks, many hundreds of thousands of perfectly apparently honest and normal people come to work in the City daily, without one thought that they might inadvertently be committing any crime. However, the vast percentage of these people become seduced into the ethic of the place, and willingly carry out the instructions of their employers and managers without giving any thought to the possible consequences of their actions. These people simply could not earn the generous salaries they enjoy, coupled with a fairly sociable lifestyle in any other walk of life, and that becomes the root of the problem.

In many cases they are not qualified to be nurses, or teachers, academics or engineers, but they don't need these particular abilities to work in the City. Frankly, the intellectual level of the average City dealing room isn't very high, but it doesn't need to be. What they all possess is a desire to make as much money as they can, which these days is provided by the payment of annual bonuses for profitable results. It is these bonuses which cement the City workers in their place, and guarantee that the vast majority of them will continue to operate in a 'no questions asked' environment. The bonus culture is evidence of the corrupting symbiotic relationship between the institution and the people who do its bidding.

The City of London depends upon these relationships to a huge extent. In this way, many actions, which could and in some cases are entirely criminal, (PPI mis-selling, LIBOR fixing), are allowed to carry on very profitably, but when enquiries are made, no-one can be identified to blame. Management can claim that egregious behaviour was carried out by a single or a small series of rotten apples, or rogue traders, (recall Bob Diamond's explanations to the Select Committee), who can be blamed for all the problems, and instantly sacked, and who are allowed to disappear into immediate oblivion. 

Just as in the days of Fagin and the Artful Dodger, the crooks could instantly get swallowed up in the back alleys and the stews of the old Victorian City, so today, the sacked traders can vanish into the ether, with surprisingly little record of their present whereabouts, and in some cases, their current names!

It is this very anonymity which allows City managers and directors to avoid being prosecuted for fraud, because they can always claim that these actions were not sanctioned by them, nor were they approved. Recall Bob Diamond again claiming that the people who manipulated LIBOR did not 'share our culture or values'! What utter rubbish, the people who were doing this knew that they would be allowed to continue fiddling the system as long as the money was coming in, and no-one complained.  Making money in the City covers up an awful lot of critical comment!

The City of London is made up of a series of interlinking financial intermediaries and banking services providers, working in partnership with a group of relevant professional services firms, lawyers, accountants, consultants, company formation agents, recruitment providers and IT services advisers.  Most of these providers are overseen, in some way, by a regulatory agency. They all depend on each other for their living and their sole function is to continue to service the financial Leviathan which has been created over hundreds and hundreds of years.

In order to work efficiently, those who exist to regulate the sector should command the respect of those whom they supervise, but in all too many cases, that respect does not exist. The financial sector despises the regulators, and considers them to be little more than a bunch of interfering busybodies who know nothing about their peculiar unique city culture. The overwhelming problem is that in the vast majority of cases, those who are employed to regulate simply do not have the faintest clue about the nature of the beast they are seeking to tame. This lacuna is deliberately engineered by the financial sector who benefit from the lack of professional knowledge possessed by the regulators.

Like it or not, the banking industry has always had two faces. There is the stern, prudent profile of the traditional conservative banker, paying significant attention to a public association with all that is venerated at the heart of the financial establishment. So, banks will sponsor the opera, the major rugby internationals, Glyndebourne, etc, in an attempt to project the image they have of themselves as being part of a long-standing tradition of probity and sound practice. However, behind this façade, is the more realistic picture of the white-socked market spiv, the sharp-suited wide-boy, on the make, on the take, and always with one eye on any opportunity to turn a profit.

This is what the American criminologist Edwin Sutherland referred to when he talked about major public financial institutions engaging in ‘…public association with high codes of conduct but private derogation from the norms…’

In 2011, I wrote a paper entitled "...DEFINING THE 'CRIMINOGENIC' PERSONALITY ..." in an attempt to better understand why the relationship between the regulated and the regulator was so inefficient.

Its sub-title was called "...Towards a better understanding of an anomic cultural phenomenon within the financial services industry..."

I began by quoting George Staple, a former head of the Serious Fraud Office, and someone not known for his willingness to prosecute City practitioners!

'…There is obviously a class of case which is susceptible to other treatment. One of the things we have to do is to see where regulation ends and prosecution begins. There are clearly cases which could fall either side, and I think what needs to be done is to define just where that line should be drawn…'

If the recent financial devastation in UK financial markets has taught us anything, one qualifier stands out above all the rest of the explanations. The effective ‘regulation’ of the market in financial services in the United Kingdom, particularly in the areas of preventing and forestalling commercial activity which has the capability to undermine the well-being of the financial market, in which we include not only financial criminality and money laundering, but also the pro-active identification and prevention  of financial damage has, to all intents and purposes, failed.

 It has failed despite the huge bureaucratic organisation which has been created for its control, because those who are employed to provide the regulatory oversight of the market, the Lead Regulator, the Financial Services Authority, and the subordinate compliance officers within the individual regulated member firms, do not and have never understood the true nature of the criminogenic personality of so many of those who profess the trade of financial practitioner, nor do they exhibit any great inclination to wish to deal with the egregious activities of these individuals in a 'policing' manner.

They have repeatedly failed to bring criminal actions against City players, even where the dishonest conduct screams out for retributive justice. In so doing they have sent a loud message to the City that  even the worst excesses will not attract criminal sanctions. No wonder one Barclays main board director was able to say to me that bankers in his class were a 'protected species'!

The specific problem of ‘regulatory resistance’ has been endemic in the regulatory model of the UK’s financial sector since the passing of the Financial Services Act 1986. One of my areas of focus is to attempt to expand and develop the concept of the ‘criminogenic’ nature of the state of regulatory resistance, or ‘legitimised deviancy’ which so many financial practitioners espouse. By ‘criminogenic’ I mean conduct or behavior which has the potential to become criminal, or at least, so vitally damaging at some stage in the process, that the problem will almost inevitably lead to further potential criminal behaviour.

A classic example is the early behavior of Nick Leeson who, in an attempt to cover up what was initially, a relatively small loss incurred by an exposed open short position, attempted to cover up the loss by engineering a series of trades which automatically led him into conduct which was deceptive, and therefore criminal.

By examining the behavior and conduct of persons within the financial sector, we can establish traits which indicate a potential to be more or less willing to engage in conduct or behavior which may result in the commission of criminogenic activity. Alternatively, where, through ignorance of the underlying criminogenic potential of new products or sales practices, those employed to ‘apply compliance procedures’ in the market ignore the likelihood of the new risks being generated. In so doing, they allow the damaging conduct to continue, and in examining this conduct, we can begin to determine where they are exposing the market to far greater systemic risk than it either needs or can cope with.

The basis of the underlying theory is a concept which is well-known to any experienced street detective who is trained to deal with crime and to recognize the signs of the criminogenic personality,  and briefly put, states that those who act or behave in an anomic fashion in their ordinary, every-day existence, who bend or break minor rules or simple laws for their own self-gratification, or who refuse to conform to ordinary norms of human conduct at times when their surrounding conditions would require such behavior,  will have a greater propensity to act in a similar, anomic way in many other circumstances, and where a situation arises which gives them a series of choices, they will inevitably take the line of least resistance. James Q Wilson, the American criminologist has alluded to this kind of ‘behavioural arbitrage’ when defining his “broken windows” theory of criminal conduct. Those who are prepared to commit minor acts of criminal activity as a matter of course, have little difficulty in committing more serious acts of criminality when occasion demands.

Looking at the theory in the financial sector, a derivatives trader who habitually spends his evenings spending vast amounts of his firm’s money entertaining clients in lap-dancing clubs, the kind of man who is willing to pay the bill for confirmed criminal offences, ie hiring prostitutes  (supplying prostitution) and supplying recreational narcotics,  is not the kind of man who is going to spend too long worrying about the finer niceties of the Insider Dealing rules or money laundering regulations. Geraint Anderson, in his excellent book,' City Boy' puts it succinctly;

‘ …prompted by the beckoning finger from the clearly coked-up Asian chick nearest the open door, I nervously walked towards the car. I clumsily shuffled into my seat and saw in the gloom my three colleagues all sitting with their respective new lady-friends. They were all snorting yet more lines of cocaine that our ever-so-thoughtful hosts had prepared for us on little mirrors…’ (Geraint Anderson)

Seth Freedman in his book 'Binge Trading' identifies the same phenomenon;

‘As long as we got results, as long as we got our commission and good feedback from the clients, they (the employing bank) didn’t really give a shit…I think the banks know the situation, and so they don’t do the random drug tests, because they know half their staff would be on it, and they know that in a high-pressure job, they have to allow their traders to have these excesses. They don’t care about the health of their workforce as long as they’re making money…’

The Financial SErvices Authority has the authority to enforce the law in the case of insider dealing,  money laundering and market manipulation. Why therefore do the regulatory agencies not employ people who have the experience to spot such criminogenic potential? It has started to become clear that those persons who are employed in the compliance function in the industry itself do not wish to be perceived to be effective in 'policing' terms or are not encouraged by their employers to become so!

The problems which have always caused financial regulators the greatest degree of difficulty are those which stemmed from behaviour which was manifestly 'criminal', whether obvious or submerged. The first kind of criminal activity can be determined by those acts involving insider dealing, money laundering, the theft of client's funds or the obtaining of money from investors by deception. The second group includes behavior which becomes criminal as a result of its commission (the trader who executes false trades, such as the manipulation of the LIBOR market, or makes up positions in order to cover up his own ineptitude, or to give the impression he has achieved certain targets.) In so doing he commits offences of Fraud, and stands to be prosecuted in exactly the same way as a person who makes a false claim for State Benefits.

Unhappily, those given the greatest degree of responsibility for ensuring compliance with the rules and regulations , and who have the role of investigating and identifying any criminogenic behaviour, have, in the vast majority of cases, no previous experience of investigating criminal offences and appear to possess no obvious skills or ability to perform an effective policing function, and more importantly, no desire so to do, nor are they apparently willing to adopt 'policing' techniques or methods.

This unwillingness to be observed to be performing a policing function has begun to impact very heavily on the effectiveness of the regulatory role, to the extent that it has begun to become counter-productive. A detailed re-evaluation of attitudes and responses has defined an alternative interpretation which could be placed upon the reasons which apparently lie behind the bland, constantly-rehearsed assertions that other, non-policing techniques could be adopted more usefully to regulate the financial sector. A hidden agenda begins to be glimpsed, one which positively discriminates against the adoption of any methods or skills which, while they might have proved to be effective against the activities of working-class criminals in the past, are positively discouraged when it comes to dealing with the crimes of the powerful. Such a policy decision can only come from Government sources, passing down the channels the way in which they want the markets to be regulated.

As a result, business conduct which, by any definition, and in any other social sector, would be deemed to be manifestly criminal, has been allowed to proliferate. Perhaps one of the more egregious example of such conduct occurred in the observance of the criminal activities of private pension salesmen, during a time when Government permitted the practice of allowing private pension companies to solicit pension transfers and contributions from the holders of occupational company pension schemes. The activities of the salesmen were nothing short of downright fraud but their egregious conduct  was allowed to be dealt with within the financial sector in other, non-criminal ways, because it had become defined in other terms; i.e. the offences of 'obtaining property by deception' or 'false accounting' had been re-determined as 'mis-selling'.

To put things as bluntly as possible, our country is in the financial mess it is in, because those who work in the financial industry have habitually engaged in criminogenic activities since time immemorial. Those employed to regulate their conduct rely too much on the expectation that the banks want to be compliant and that any problems are caused by rogue elements. Those politicians whose interests are served by the City delivering a satisfactory through-put of cash for the Treasury find it more efficient to turn a blind eye to the true state of affairs and only get involved when they absolutely have to, preferring to leave it to these ineffective regulators, in the hope that they, the politicians, cannot be blamed for the mess when the Augean stable proves to be too smelly to cleanse.

It is a vast 'blame game' in which each party seeks to level the finger at the other, and no-one carries the can in the end, leaving the bill to be paid for by the tax-payer. It has always been like this, and until and unless something is done to  truly reform the system, it will continue like this.

In this series of articles I shall demonstrate how it was ever thus!