Monday, July 14, 2014

Understanding financial criminals - Why 'Shredded' must become compulsory reading!

Ian Fraser's new book 'Shredded - Inside RBS - The bank that broke Britain' should become required reading for every civil servant at H.M.Treasury, for every apparatchik in the FCA, and for every politician whose brief engages with the City.

Ian lashes out with fists crammed with facts, and his book leaves a wide variety of players badly bruised and with reputations seriously diminished!

When I was a detective at the Fraud Squad at New Scotland Yard, I had many opportunities to investigate and evaluate the attitudes and business morality of City bankers and other financial practitioners.

Between the years 1979 to 1986 I investigated the affairs of dishonest men (almost exclusively) who believed that their positions in the City hierarchy made them immune from the ordinary implications of the criminal law.

I also had a lot of dealings with civil servants, mainly from the Department of Trade and Industry, and I was constantly appalled by the lack of practical knowledge of the ways of criminals that they brought to their role as regulators of the financial sector. 

I was shocked by their arrogance, their insouciance, and the way that they believed that they were an all-knowing source and fount of expertise, when in so many cases, they were totally incompetent.

I rapidly came to the conclusion that one of the reasons that so much crime flourished in the financial sector was because the practitioners themselves believed that they were above the law and would not be prosecuted, while those who existed to regulate their activities, were largely useless and shockingly incompetent, but who knew that if they waited long enough, and didn't rock the boat, a job would be found for them in the financial community in the longer term.

Too many people in the DTI regulatory divisions had become subject to a phenomenon called 'Regulator Capture', in which a cosy relationship was allowed to develop between regulator and institution, and an unspoken agreement existed whereby both sides knew that in return for studied non-intervention, employment rewards awaited the compliant regulator!

Anyone who has worked in the financial sphere for any time has known these features. Anyone who has worked in the regulatory environment has seen the corrupt and corrosive atmosphere they inculcate, and the wrong-doing that is allowed to proliferate.

I have worked in this sphere for many years and I have seen all these phenomena and more, and, as each new bank scandal, criminal act, scam and rip-off went by unmolested, I had begun to despair that there would ever be a proper denouncing of the whole rotten edifice.

Well, now, at last, there is Ian Fraser's excoriating book, 'Shredded', and what amazing reading it is. He unpicks with forensic care the entire diseased carcass of what was the Royal Bank of Scotland, and he lays bare not only the bones of a once-great institution, but he exposes the sociopathic behaviour of a CEO, Fred Goodwin, or 'Fred The Shred', who presided over the denouement of this important bank.

In the telling of the story, a Greek Tragedy emerges as the arrogance and hubris of Goodwin are dissected and his ultimate downfall is foreseen!

But what makes this book so compelling is how Fraser manages to demonstrate the way in which the stage upon which Goodwin would tread his doomed existence, was prepared for him by earlier failures to regulate the banking sector. I intend to quote from selected paragraphs to illustrate this vitally important issue!

Talking about the regime of regulation, Fraser points out how New Labour re-designed the Margaret Thatcher model of financial regulation.

"...Brown and his advisors including Balls and Steve Robson (senior civil servant in H.M.Treasury who would later go on to a job with a major bank), decided Thatcher's patchwork quilt of regulators would have to go...It had turned out to be...incapable of preventing scams, financial disasters and swindles..."

"...But as New Labour's Financial Services and Markets Bill wended its way through Parliament, concerted lobbying by banks...ensured that the new regulator had its wings clipped before it had even hatched..."

Among its most deviant legacies was the requirement  that the new regulator, the FSA "...must consider the international mobility of the financial business before taking any enforcement action, and avoid damaging the UK's competitiveness..."

There, in black and white was the mantra which exonerated a new generation of incompetent regulators, who could always pray in aid this stipulation as a justification for doing nothing when the fight got hot and dirty!

Nick Cochan, a fine journalist pointed out that this phrase put bankers above the law, where they have remained until this day!

Another major problem was Gordon Brown, who was described by Steve Robson as 'having no interest in financial regulation'. Because Brown ignored it, the best and brightest Treasury civil servants ignored it!

This is always the problem with civil servants, they will look to see which issues their political masters espouse and then commit themselves. The stage was being set under Brown and Ed Balls for a regulatory-free zone in financial services, in a market run by a group of financial great white sharks.
Blair was no better, he was not interested in financial regulation either. 

",,,In March 2003, the Blair Government indicated what sort of regulator it wanted when it announced that former Barclays investment banker, Sir Callum McCarthy was taking over as FSA chairman...On his watch the FSA succumbed to regulatory capture, not least with the appointment of James Crosby of HBOS as a non-executive director..."

This period was characterised by the emergence of 'light-touch regulation', a phrase which became synonymous with 'no regulation at all'.  "...Blair, Brown and regulators like McCarthy had created an environment in which financial firms...were pretty much above the law..."

As an epitaph for the state of financial regulation at this time, the following paragraph sums up the state of play in London at the start of the Great Financial Crisis.

"...In a memo one former FSA senior executive revealed that between 2003 and 2008, mid-ranking FSA staff were, for the miost part, incompetent, poorly qualified and of too low a calibre to have any chance of reguating the financial services sector. Others were too lazy and complacent to bother checking up on what financial firms were doing. He added that none had the influence or the inclination to challenge the pervading 'light touch, laissez-faire regulation'... FSA supervision was hollowed out and its depleted ranks were staffed with mediocre people who cared little about the business of supervising firms..."

For years, people like myself and Ian Fraser, Nick Cochan and others, have been identifying these shortfalls and incompetencies. We have written about them, we have spoken on public platforms, and all the while, we have been routinely ignored. My evidence on this topic which I sent to the Parliamentary Commission on Banking Culture and Standards was conveniently 'lost' by the Government servants, who initially denied having received it, and then later, when admitting they had had it all the time, said it had to be redacted (censored) because it contained evidence the banks wouldn't like.
(Actually I rather thought that was the whole point!)

Ian Fraser's brilliant book deserves to be read by anyone who has any interest in understanding why and how our financial services sector has been allowed to become an organised criminal enterprise, run by a mob of mafia goombahs!

It is an important piece of work because it throws down a heavy gauntlet to the financial establishment and challenges them to pick it up and answer the charges it contains. Ian has done what very few writers succeed in doing, he has confronted the otherwise 'protected species' and laid bare their inadequacies. They must respond or stand accused of craven complicity in assisting in a world turned upside down!

Friday, July 11, 2014

Barclays Compliance Programme - A Triumph of Hope Over Experience

Barclays' Compliance Programme - A Triumph of Hope over Experience

I have been giving some more thought to the proposed Financial Compliance Centre being set up at the Judge Business School in Cambridge, in conjunction with Barclays Bank.

In so many ways, this proposal is wholly predictable, and in its own way, it identifies so many of the problems which beset the management of the British financial sector, which have resulted in the creation of a monster which has become too big to fail, and whose senior executives have become too big to jail!

The first, and perhaps the most obvious piece of predictable conduct is the marrying of Barclays Bank and Cambridge University.

Barclays Bank has always thought no end of itself, its executive culture has always been one of effortless superiority and high-class status. It was a Barclays Main Board Director who, at a dinner for delegates at a very exclusive executive 'retreat' at which I had been speaking, said to me;

"...You are entirely wrong if you believe that H.M.Government will ever prosecute someone from my class for financial crime or money laundering. This will never happen, we are a protected species..."

Over the years I have come to realise he was absolutely right, and that Barclays work very hard to maintain that level of Establishment protection. It is the very essence of this class-based approach towards financial services which has always bedevilled the British approach towards the way in which it views dishonest conduct in financial markets, and more importantly, how it should be dealt with.

When I was a detective at New Scotland Yard, I was sent to America to study financial regulation, US style! John Fedders, the Head of Enforcement of the SEC said to me when we met;

"...You British assume that everyone who works in the financial sector is a gentleman and you are shocked and horrified when you discover the opposite is true. In America, we assume that everyone who handles another person's money has the propensity to be a crook, and we legislate for the likelihood. When you stop pretending that markets can be regulated by 'good chaps' in between doing deals, and make the money available to regulate your markets effectively, then we will take you seriously. Until then, don't waste my time..!"

Sadly, the 'good chaps' imagery still operates in London.

Whenever Barclays have needed to project a more compliant image, they have always found an acceptable formula aimed at placating the British Government's ire! Hence the appointment of H.M.Treasury and Banking Establishment guru, Sir David Walker whose appointment as bank Chairman came within a month after former chairman Marcus Agius and Bob Diamond resigned within 24 hours of each other in the wake of the LIBOR criminal scandal.

Among other good reasons, Sir David was appointed to the post because he has an impeccable business and regulatory track record and is respected throughout the banking and financial services industry as a safe pair of hands, as well as being seen as an Establishment figure by Government. His appointment would have been seen as part of Barclays 'doing the right thing'!

So, it was probably inevitable that when Barclays decided that they had better do something to re-engineer the public perception of their criminogenic personality, that they chose to engage in the symbolic way that all high rollers do when they need to buy good opinions, by giving away lots of money to charity, albeit in a novel manner. By partnering with Cambridge University, the image of two of the most elitist, 'good chaps' organisations coming together in a mutual synergy becomes a trifle predictable! 

"...Sploshing the dosh..." is a tried and tested practice which has worked well over the years. Al Capone, in his time was extremely generous and outgoing. He attended baseball games and city functions. He donated money to many good causes and was known for his charitable giving. 

Al Capone opened up the very first soup kitchen in Chicago. He wanted to make sure everyone in the city who were jobless or homeless had a hot meal. Capone's kitchen served three meals a day and his soup kitchens exist to this day. 

Barclays, no doubt could have opened some food banks which would have had an immediate poverty-alleviating effect, but it is unlikely that would have fitted as well with their patrician image.

Instead, they turned to Cambridge University, another bastion of the Establishment, to become the recipient of their largesse! The Judge Business School turns out lots of highly qualified post-graduates who find jobs in banking and financial services, so the donations were not going to an undeserving cause!

"...The Cambridge-Barclays Compliance Career Academy is the first programme to be established under the school's Centre for Compliance and Trust. Its focus will be on a values and judgement-based approach to compliance, leading thinking and creating understanding around the emerging regulatory regimes which are being developed around the world..."

The University will take Barclays' money gratefully, all universities need munificent donors these days. Together, the two institutions have become a self-serving marriage made in heaven, and between them, they claim to have set up the first executive education academy for compliance in a bid to change the way the financial industry is run. 

This is not correct of course, there are already extremely successful similar academic courses being run at Portsmouth University, Sheffield University and Newcastle Business School.

More expertly, the Financial Regulation and Compliance LLM Courses being run in London at the BPP University Law School in Holborn offer a wide variety of courses for international students.

...The BPP University LLM (Financial Regulation and Compliance) focuses on the law and practice relating to the regulation of investment business in the United Kingdom from the perspective of compliance. The core module on financial regulation and compliance addresses the regulatory and legal environment within which persons authorised to conduct investment business operate. It also focuses on the particular role of compliance in the control and management of primary legal and regulatory risks. It is therefore far more than a programme on compliance. It is taught by practitioners and addresses the practical and problematic issues – including, for example, the personal exposure of compliance officers to legal and regulatory risk and the relevant law and practice to the exposure of financial intermediaries and their advisors to the legal risks, both criminal and civil, in handling other people’s wealth..."

In my earlier piece, I posed a challenge to the new Cambridge course managers by suggesting a programme on white collar criminogenics which I believe should be included in the programme, to give it a real relevance.

I do not expect them to incorporate such a module because it is not the sort of study that banks and patrician universities wish to include in their Business School offerings. The traditional view of financial regulation does not wish to include any study of any topic which smacks of criminality, because that immediately aligns their role with a policing one, and if there is one thing any compliance officer knows is that they do not perform any form of policing function, yet it is these elements which pose the greatest danger to the industry, because it is this behaviour which always causes the greatest volume of loss, and which explains why practitioners are so willing to break the criminal law.

If compliance practitioners are going to be really effective in identifying and recognising egregious conduct and dishonest behaviour among the practitioners they regulate, then they need these skills, and they need to be able to recognise the 'signs of crime', otherwise, they are worse than useless in their role.

For these reasons I am going to wait and see how effective this new exercise in academic partnering will be. While it may well be successful in assisting in the resurrection of the Barclays' reputation, I truly doubt it will add anything to our knowledge of how to effectively combat financial crime!

The real test will come when graduates of the school prove their worth in their compliance role by demonstrating that they have inspired and maintained a programme of financial compliance within which ethics and best practice are extolled, and where profits are honestly earned through good business conduct and fair dealing.