Britain ignores this epidemic of financial crime at its peril
This blog was first posted by Ian Fraser on his blog on 1st August. I am grateful to him for allowing me to reproduce it here!
The most prestigious names in the British banking and finance routinely engage in criminal activities on a scale that would make any Mafia family proud.
Whether it is by facilitating international money-laundering; manipulating markets through Libor rigging; institutionalised insider dealing; misappropriating money from clients’ pension savings funds through hidden fees; ’misselling’ inappropriate financial products to customers … an industry that once had some claim to integrity and decent values has become a byword for crime on an epic scale.
The recent revelations about Libor-rigging by Barclays, and about the blind eye that HSBC turned to money laundering for despotic regimes, drug cartels, terrorists and organised criminal gangs over more than a decade, have finally lifted the veil of deceit and hypocrisy behind which these institutions have hidden for may years.
Many people have recently asked me to explain the concept of ‘misselling’ where it relates to banking activities. They have read about banks and other financial institutions being forced to repay billions of pounds to clients, savers and investors but are confused as to what has been going on. ‘…If there was nothing wrong with their actions…’, they ask, ‘…why do they have to repay the money..?’
It’s very simple.
Financial institutions make massive profits from ‘cross-selling’ financial products including insurance policies, pension plans, loan protection, etc to their existing customers. They encourage financial intermediaries to introduce clients to them, as well as asking front office staff to sell these often useless products to unsuspecting clients — whilst making it very clear that staff bonuses are dependent upon the number of these products they sell.
They give these employees very little training (training is expensive because the employees are away from the sales-point for too long), but they expect them to sell complex financial contracts to clients, the vast majority of whom have very little expertise or proper understanding of what they are entering into.
What became known as the ‘great pensions swindle’ was driven by the introduction of more flexible pension rules in 1986. Insurance companies launching personal pensions were offering massive carrots in the shape of generous front loaded commission payments to financial advisers and banks who sold them to their clients. The advisers duped hundreds of thousands of ordinary people who had very safe and beneficial arrangements in existing occupational pension schemes, into switching into unsuitable or risky pensions.
We have more recently seen similar issues with regard to payment protection insurance, (PPI). Banks ‘missold’ largely redundant PPI to UK consumers in industrial quantities, and complaints about it fell on deaf ears for well over a decade. The ‘misselling’ was being carried out by not only the banks or providers but also by third-party brokers. Following a seminal court case in April 2011, British banks face paying the customers they conned a total of £8bn to £10bn in compensation.
More recently, it has emerged that high street banks systematically ‘missold’ wholly inappropriate complex derivatives known as ‘interest rate swaps agreements‘ predominately in 2006-07 to their small and medium-sized enterprise customers. The banks did this by omitting important information or lying about the true nature and implications of the swaps. Already, tens of thousands of British businesses are struggling to meet their payments, verging on bankruptcy, or already bankrupt as a result after being duped into taking out falsely presented swaps including ‘caps’ and ‘collars’.
All these examples are straightforward criminal activities.
If you induce a person to pay money or commit to paying money to you, and in the course of so doing, you lie to them about the product you are providing, and because of your lies, the other person agrees to the proposal, you have committed the criminal offence of fraud.
If you lie to someone or even if you don’t properly explain important elements of a proposal and as a result they agree to allow you to obtain a financial benefit, you have committed a criminal fraud.
If you take money from a client’s account without telling them or properly explaining the implications of what you are doing, you are committing a criminal fraud.
There are effectively three main ways by which any person can commit fraud. Under the Fraud Act 2006, they are
Fraud by false representation
Fraud by failing to disclose information
Fraud by abuse of position
If a person misleads the benefits agencies as to the true state of their affairs when applying for social benefit payments, they commit the offence of fraud, and people are routinely imprisoned for such criminal offences. If a financial institution does the same thing, it is called ‘misselling’!
The financial institutions commit these offences routinely every day and in every way, and have been doing so for years. The problem is that the incidence of such fraud is so immense that there has been no politically acceptable way to describe these activities. If the British government had to openly admit that these activities were fraudulent, can you imagine the international implications that would have for the British financial system and the financial sector?
That is why this meaningless but politically-correct form of words was first created, it is a concept entirely unknown to British criminal jurisprudence. But what it does do is to disguise the implications of this criminal activity and downplays the vast scale of criminal enterprise which is being perpetrated every day and under our noses, by the people whom we ought to be able to trust implicitly.
Money laundering is a crime in its own right, and laws have existed to outlaw its commission since 1994. There are also significant volumes of regulations which financial institutions are supposed to implement. Their breach too is covered by penal sanctions. Unfortunately from 1994 to 2000, none of the UK’s regulatory agencies would accept responsibility for policing these provisions, so the financial institutions chose to largely ignore them.
They did little more than pay lip-service to them but wholly ignored the proper implementation of their requirements. Since 2000, The Financial Services Authority has been supposed to police the compliance with the Money Laundering Regulations, but they have been very slow to act, and despite issuing sternly-worded reports, both in 2001 and in 2011 demanding better compliance, the laws are still generally ignored.
Insider dealing is rife and examples of such trading by persons operating through investment banks and equities brokerages are regularly observed in the securities markets. The FSA has begun to take more action against such criminals in recent times, but again, their actions have been too little and too late, and most City insiders know that the risk of being caught are extremely small.
Market manipulation such as the Libor rigging activities are also criminal offences, and the tremors unleashed by the recent publicity regarding the part that just Barclays has played in this scandal, have already cause four high level resignations at the bank, and further revelations about what some regulators are describing asorganised fraud on a vast scale are expected in weeks or months.
These actions are crimes in their own right and those who commit them are criminals. It has been a common feature of our systems of criminal justice to overlook or downplay the incidence of criminal behaviour committed by members of what was once called ‘the upper socio-economic group’. I prefer the more down to earth phrase, ‘the crimes of the powerful’, but whichever phrase you use, they refer to the same activities.
Criminal offences being committed for vast financial gain by persons and institutions which would prefer to claim a reputation for honesty and integrity. They make this claim repeatedly, but it cannot cover up the fact that in their business activities they routinely commit many crimes which government and law enforcement can no longer continue to ignore by just making up some equally ersatz statement and thereby hoping the problem will go away.
Rowan Bosworth-Davies is a former Metropolitan Police fraud squad officer and a former head of investigations at City regulator Fimbra (0ne of the predecessor bodies of the FSA) who now works as a specialist financial crime consultant. He blogs at Rowan’s Blog. The article was first commissioned by the Sunday Herald but has not previously been run in its entirety.