Trying to make sense of mob violence

Listening to the media in these last few days, I have been swamped by the plethora of opinions seeking to explain the recent rioting in London and elsewhere.

It is pointless refusing to try and understand why these events are occurring because they will inevitably re-occur, and we shall not have leaned any lessons from the experience.

Much of the explanation, I believe, lies in the cultural mind-set of the groups of people who are committing much of this violence. It is a mind-set moulded by failing social background, role-model absence, educational rejection, all leading to a recognition that access to the traditional status of success in the eyes of the community from which they come, is denied to them. If they cannot achieve ownership of the trappings which designate success by lawful means, they will do so by criminal means.

Emile Durkheim defined this kind of conduct as 'Anomie'.

According to Durkheim, anomie is a breakdown of social norms and it is a condition where norms no longer control the activities of members in society. Individuals cannot find their place in society because they either have no clear rules to help guide them, or they have rejected those standards. Rapidly changing social conditions as well as a need to adjust to widening disparities in wealth, work and aspirations, leads to dissatisfaction, conflict, and deviance.

For Robert Merton in 1938, the term anomie, meant a discontinuity between cultural goals and the legitimate means available for reaching them. Applied to Western cultures, the emphasis on the goal of monetary success but without the corresponding emphasis on the legitimate avenues to march toward this goal, stimulates a huge sense of normlessness. In other words, many people in a society may aspire to be viewed as 'success' models, flaunting the badges of such success, but the ways in which people go about obtaining those success symbols are not the same, because not everyone has the same opportunities and advantages as the next person. This leads almost inevitably, to deviance.

Such deviance is not contained to the underclass however. Other members of other social groupings will also commit crimes to achieve success (Insider Dealing, Market Manipulation, Money Laundering, etc) but in this article we are looking at the riot and looting impulse, which is largely, but not exclusively an underclass phenomenon.

A significant amount of the violence and looting appears to have been generated by a type of individual, who when interviewed by media representatives, gives dis-jointed explanations for his conduct. What does come across most clearly is that they appear to have no concern for the likely consequences, if they were to be arrested. It is almost as if they view the likelihood of a custodial sentence as an inevitability in their life, indeed, many of them may already have experienced such a phenomenon. So the first observation is that they do not appear to have any fear of even the most severe social interventions. These are young people with nothing to lose, so through looting, they have everything to gain! It is another form of terrorism, where ordinary people are put in fear, where extreme violence is routinely used, but the ambition is greed.

Another observation is that they all aspire to the very trappings of success which are denied to them by their rejection of the education process, thus exacerbating their inability to get jobs. They target shops selling expensive training shoes, gold and jewellery, electrical goods, mobile phones and computers, all the detritus of the 'celebrity' status which they so earnestly crave.

They loot shops because they can, and when there are enough of them, acting in concert, there is very little to stop them. These actions are fluid, they differ from ordinary political riots where the aim is to confront authority, these are more like hit and run tactics, always moving, thus making them much, much harder to Police and control.

Government must begin to address the very real problem of social inequality. Just providing more hard-pressed tax-payers money in the form of welfare benefits is not the answer. The welfare states which for the last 60 years have provided our social environment with cradle-to-grave protections in terms of health, education and social welfare are now facing insolvency. Putting it at its simplest, they are running out of money, while at the same time, they are having to face up to the likelihood of a future in which fewer individuals will be either willing, or indeed available to provide the necessary degree of funding to continue to maintain those benefits at even contemporary standards.

Politicians must begin to recognise that in many areas of our country there are communities with no possible likelihood of work, no real care for the future, and whose many unplanned children are born into social dysfunctionality which no amount of intervention will prevent. These feral communities have no fear of authority, they are inured from their earliest days to consider all forms of social control as something to be rejected and they will continue to provide the means for further riots and looting in the future, as they begin to realise what they can achieve by these actions.

When we begin to recognise that a new form of terrorist warfare is being developed, then we can begin to define ways of dealing with these individuals!

Responding to FSA Demands for Remedial Activities.

A recent report in June 2011 by FSA, identified serious weaknesses in the management of important compliance requirements, across a wide range of banks and financial institutions.

Specifically, with regard to client identification issues, PEP handling, correspondent banking and wire transfer activity, the Report found significant short-comings in a large number of banks reviewed.

The FSA stated; '... We will, where appropriate, use our enforcement powers to reinforce key messages in this report to encourage banks and other firms to strengthen AML systems and controls and deter them from making decisions which do not take adequate account of money laundering risk...'

That Report should have been an alarm bell in the night for those banks whose failures to provide adequate preventative provisions, bring themselves within this category.

But how has it got to this state of affairs in the first place?

Well, the first people to be blamed are the FSA themselves. They have consistently failed to enforce the AML Regulations with any degree of rigour. They have continued to issue discussion documents when they should have been giving these banks a serious going over for failure to adhere to the Regulations.

This meant that the banks only implemented compliance controls in a fairly piecemeal fashion, and with no great degree of willingness to spend any realistic sums of money on implementing truly effective controls.

Yes, the regulators did issue fines and costs from time to time, but it is pointless fining a bank. They can always pay the fine, and then pass on the cost right back to their customers. If all a Regulator does nothing more than impose a fine which the institute has no difficulty in paying, then they only have themselves to blame for allowing this dreadful state of affairs to flourish. They have always failed to understand the culture of the banks they supervise.

Let us start by recognising the most basic of all truths which attach to the banking sector's willingness to engage voluntarily with financial regulatory requirements - particularly as they pertain to anti-money laundering - they just don't give a damn about it. Consider these quotes from the FSA report;

'... Some banks appeared unwilling to turn away, or exit, very profitable business relationships when there appeared to be an unacceptable risk of handling the proceeds of crime. Around a third of banks, including the private banking arms of some major banking groups, appeared willing to accept very high levels of money-laundering risk...'

'... Our main conclusion is that around three quarters of banks in our sample, including the majority of major banks, are not always managing high-risk customers and PEP relationships effectively and must do more to ensure they are not used for money laundering. Despite changes in the legal and regulatory framework a number of the weaknesses identified during this review are the same as, or similar to, those identified in the FSA report of March 2001 covering how banks in the UK handled accounts linked to the former Nigerian military leader, General Sani Abacha. We are concerned there has been insufficient improvement in banks’ AML systems and controls during this period...'

By far the most egregious however was; '... At a few banks, the general AML culture was a concern, with senior management and/or compliance challenging us about the whole point of the AML regime or the need to identify PEPs...'

What these three statements identify so clearly is that the British banking fraternity have together stuck two fingers up to the law and the regulations which seek to prevent criminal money from being moved through our institutions. It's not an accident, it's not inadvertent, it is deliberate, concerted and done with the most simple motive, greed!

So, what happens when the FSA has been in and conducted an Arrow review? When the glaring lack of any meaningful controls has been identified and highlighted; when the absence of any realistic transaction monitoring IT systems is discovered; when the KYC processes ignore more than they recognise, then there should only be one way forward.

Such an absence of controls is primary evidence of a wholesale policy of deliberate evasion of the law, with the aim of generating even more financial gain, in other words, an exhibition of organised criminality.

That conduct should be treated in the same way as other major organised criminals. The Chief Executive should be invited in to a meeting at the FSA and promised that unless his systems and controls are brought into an acceptable condition within a short space of time, with the proper trained staff to operate them, then he and his main Board will be prosecuted for the failure to implement the necessary degree of controls, and a custodial sentence sought.

This may sound draconian, but I believe that it is the only way to engage the hearts and minds of these executives who are willing to deliberately ignore the law in the name of profit. They have had years to get their act together and they have wilfully ignored the requirements.

So, let them spend some time in Wandsworth. It won't take long for the message to get round the other institutions, which would trigger off a Gadarene-like rush to start to undertake the remedial exercises properly. Such a criminal conviction would disbar these men from any further role in the City or the banking sector, and it would predicate a period of wholesale reform in the boardrooms of every banks in the country.

So, let us hope that those with the power to enforce the Money Laundering Regulations start to view some of the most egregious financial institutions who fail to demonstrate that they are taking the implementation of proper remediation, as the organised criminals they undoubtedly are, and deal with them accordingly. It would be amazing what a few weeks banged up would achieve!

Coming to terms with the implementation requirements of the The Bribery Act

Last week I attended the IMLPO Members' meeting. One of the speakers dealt with implementation issues of the new Bribery Act from a practitioner's perspective.

I found some of the aspects of his presentation rather puzzling as his tone seemed to take the stance of '...well this stuff is all so jolly difficult, I don't know how Parliament expects us to successfully implement these requirements...'

I don't doubt that the speaker was truly conscientious in his views and that he was making statements that he believed would be helpful, but I still got the impression that he was trying to find big reasons why implementation of the compliance regime would be very difficult, and thus might take a lot of time!

One of his first issues where was where in the organisation does responsibility for Bribery and Corruption issues lie? Which department should it reside within, Compliance or Financial Crime.

A straw poll identified that delegates were split approximately 50/50 in their organisations between the two departments. I asked why this should cause such a division of opinion, and no-one could provide a realistic answer.

Let me pose an explanation which I suspect gets somewhere near the truth.

First of all, there can be no doubt that the Bribery and Corruption requirement lies firmly within the responsibility of the Compliance Department. While it is a financial crime, it is primarily an issue of culture, and its best practice compliance should be a joint responsibility between the Compliance Department and the HR Department.

It should be one of the first issues that a new entrant to any firm should be fully versed in the company policies regarding its adherence. It goes to the root of the culture within the organisation and should be a primary responsibility of the Compliance Department.

The problem is that over the years since the introduction of these internal responsibilities, many Compliance Departments have become more '...holier than thou...', and have become a repository of acres of written process procedures, and manifesting a box-ticking mentality. Rarely these days do the pure compliance operatives, particularly in big organisations, think out of the box (nor in so many cases are they encouraged so to do), and to have to suddenly become responsible for something as grubby and tacky as enforcing the Bribery and Corruption policy requirement, for many of them is anathema.

So, in all too many cases, it gets dumped on the Financial Crime Department, which again, in so many cases, is beginning to resemble the '...Department of last resort...' for issues that no-one else wants to deal with. Wrong place to put it, I'm afraid, it needs to become an integral aspect of the firm's culture, and that is where the Compliance Department comes into its own.

Other aspects which seemed to cause concern were a number of small, frankly minor issues which seem to have become escalated into major problems. One such was the issue in Hong Kong and China, and perhaps elsewhere in S.E. Asia, of the giving of very small presents of mostly nominal value, usually only a few pounds in local currency, in small boxes, at culturally important times of the year. In this case I think it was the New Year celebrations.

The speaker became very engaged in the legitimacy of such an act, did it constitute a bribe, how should it be handled? I really couldn't understand for the life of me what the problem was.

It is clear that such an activity is a routine act of simple good manners within the local culture, ( a bit akin to the sending of Christmas Cards to clients and friends) and causes no-one the slightest concern. I can't imagine that the success of huge financial deals ride on the back of such minor pleasantries. Yet this single issue caused significant discussion.

If in doubt, practitioners should simply write this small act of good manners into their compliance policy document, stating that it intends to continue to follow local custom and practice of exchanging a minimum sum of money in this issue, and leave it at that. I can assure anyone that the Director of the SFO is not looking to prosecute people for these kind of de minimis issues, and they should not be causing the level of discussion, concern and debate they seem to be causing some major banks.

However, such discussions are par for the course in these institutions, because it enables them to drag their feet and spend a lot of time debating these minor issues, all the while seeking to persuade the Regulator that they are doing their best to provide compliance.

We saw exactly the same kind of conduct in the aftermath of the introduction of the anti-money laundering legislation, where vast amounts of time were wasted in trying to define an approach to the new Regulations.

The Bribery Act requirements are sensibly enunciated and well written and should not be causing these problems. If you believe that by dragging your heels over implementation of the regulatory requirements, that you are buying yourself time and saving money, think again! Practitioners would do well to read the story in the Daily Telegraph of 11th July which indicates that the US Justice Department is considering prosecuting News International, in the USA, for paying corrupt sums in London to corrupt British policemen.

Take this as an important lesson, if the Brits don't get you for bribery or corruption, it is almost certain that the Americans will, if you are on their radar, or you facilitate bribery payments in dollars.

A morality tale for our times !

The sudden demise of the News of the World is a modern morality tale. It possesses all the necessary ingredients for a great fable of today. News International is an organisation that had begun to believe in its own invincibility, that it was '...too big to fail...' and that if it should ever face a threat to its hegemony, it could always look to its friends (and camp followers) in politics, to keep it out of harm's way. It incited a once-proud journalistic tradition to become sullied with a 'get a story, any story, at any costs' mentality, and it encouraged some of its employees to cut any corner, break any rule of 'best practice', avoid any of the checks and balances, which most decent journalists recognise as being integral to their trade. It dirtied its hands by associating itself with the grubby, dirty rain-coat brigade, men who would stoop to any level to get the information their paymasters wanted. So they would hack the message-boxes of the mobile phones of bereaved parents, murder victims, or the families of the victims of terror, to get scoops and stories which might earn them a few more quid. As one journo recently stated, '...at Wapping you were only as good as your next story...'

Now, it seems that the entire public is up in arms at the degree of the scandals which are emerging from the outcome of this shameful tale. Police investigations are being promised, although many of the most shameful elements, certainly to those of us who were proper police officers in the past, will involve investigating the police themselves, for their part in accepting corrupt payments. We are advised that the watchdog put in place to oversee the activities of the Press will be given more powers, and that a number of people will be sent to gaol, for the part they have played in these scandals.

This story still has a long way to run and we should not be unduly surprised by other revelations that may emerge.

The underlying influence that has marked out this whole sorry saga, is the degree to which, the News of the World had jettisoned any semblance of integrity it might have once claimed to hold. Integrity is the mortar by which we cement together the ethical bricks in the moral walls with which we surround and protect our basic values and norms. Integrity or its absence, is what underpins all our actions and decisions, and determines how we will behave in any given set of circumstances.

In these modern times, where in the world of commerce and business, it seems that anything goes, and should be allowed to happen, as long as the end result is acquisition of a new story, at whatever cost in terms of the erosion of public taste, or the creation of yet more money, even in the most dubious of circumstances, integrity has become a much maligned concept.

It is instructive to observe how, as the standards of journalistic integrity have been undermined by a culture of 'anything goes', the same diminution of banking integrity has become more apparent. Where once, basic rules of conduct ruled the way in which journalists pursued their trade, the same went for bankers.

When every community of any size had at least one if not two financial services providers, each branch manager was required to take responsibility for the money he loaned, and to ensure its return, with interest, in due course. Once the real distinction between retail and wholesale banking disappeared after the 'Big Bang', and banks became the purveyors of financial products of largely dubious value, ignoring their fiduciary duties owed to their customers, then money merely became another commodity to be disposed of at will, regardless of the ability of the recipient to re-pay, because it no longer mattered. Banks had found marvellous new ways of packaging debt so that it could be sold on as investment-grade paper.

When you then paid bonuses of obscene proportions to young salespeople as an incentive for them to deliver even more loan activity, coupled with flaky insurance policy sales, and you had a recipe for disaster. Anyone with half an ounce of common sense could see the likely outcome, everyone that is apart from Gordon Brown and his cronies, who instead of reining in the banks, believed their snake-oil stories and allowed them a 'light-touch' regulatory regime.

During this time, anything remotely resembling integrity was jettisoned, as more and more greedy bastards piled in to the bonus culture offered by the banking sector, and more and more fraud and financial wrong-doing was practised, market prices were manipulated, insider dealing flourished, while the bankers paid themselves bigger and bigger bonuses for operating a failing market.

We are now all paying the price and it will be a millstone round our necks for years to come.

This is what happens when integrity, best practice, sound principles and downright fraud are allowed to become the leitmotif of the market concerned.

Whether in Wapping or Lombard Street, once you jettison the basic principles of integrity and best practice, you open yourselves up to levels of wrong-doing you would once have thought impossible. Wherever you look in our business culture, the '...get the money at all costs...' mentality prevails, and the damage it does to our reputation is immeasurable.

Whether this lesson will get through to the upper floors of the banks is a question no-one can answer!

Banking arrogance - Will these people never learn?

The latest report by the FSA makes for some very sorry reading indeed.

The report entitled '... Banks’ management of high money-laundering risk situations - How banks deal with high-risk customers (including politically exposed persons), correspondent banking relationships and wire transfers...' is a shocking denunciation of the way in which a series of simple regulatory requirements have become so widely flouted by the financial sector.

The FSA states in the preamble to its Executive Summary;

'... As a result of this review and our concurrent casework, we have referred two banks to our enforcement division after identifying apparent serious weaknesses in their systems and controls for managing high-risk customers, including PEPs. We are considering whether further regulatory action is required in relation to other banks and further cases may be referred to enforcement...'

What the FSA has found in its survey is that a great number of those banks inspected '... appeared unwilling to turn away, or exit, very profitable business relationships when there appeared to be an unacceptable risk of handling the proceeds of crime. Around a third of banks, including the private banking arms of some major banking groups, appeared willing to accept very high levels of money-laundering risk if the immediate reputational and regulatory risk was acceptable...'

Consider the following scenario! A Client Relationship Manager from Megabank plc is chatting to a new client referral.

CRM: '...How much did you say you wanted to introduce to us, Your Excellency..?'

Client: '...My dear chap, just call me Mustafa...'

CRM: '...Thanks Mustafa, I think you mentioned something in the region of 100 million, was that pounds or dollars..?'

Client: '...Well, it's in dollars right now but we were hoping you could arrange for it to be converted to Sterling and Euros. We are not anxious to upset our US friends who have only recently transferred the latest tranche of their humanitarian aid package to out Treasury. Our President is anxious to keep them onside..!'

CRM: '...I see no problem in making the conversions using some of our own facilities abroad. Our Wealth Management Division has branches in a number of interesting foreign jurisdictions...'

These institutions appear to have lost sight of the primary point of the AML Legislation and Regulations, which is to prevent and forestall money laundering, and in recent months we have seen an exceptional amount of money exiting the Middle East as the Arab Spring has started to take effect. Have these banks somehow lost sight of the fact that many of these millions may be the proceeds of the looted Treasuries of countries seeking to overthrow years of cruel dictatorships, or just as likely, the rake-off from foreign loans and aid packages made to countries with difficult political situations! This what the FSA means when it talks about '... when there appeared to be an unacceptable risk of handling the proceeds of crime...'

'... Over half the banks we visited failed to apply meaningful enhanced due diligence (EDD) measures in higher risk situations and therefore failed to identify or record adverse information about the customer or the customer’s beneficial owner. Around a third of them dismissed serious allegations about their customers without adequate review...'

Client: '...You may have heard some rather unhappy stories about our President and his family in the news recently. I assure you they are not true, merely planted by enemies who have no respect for our President's wisdom and love for his people...'

CRM: '...We understand only too well how such unfair allegations can be made against men of impeccable reputations, please do not concern yourself...'

If over half of the banks reviewed were willing to adopt these cavalier attitudes towards high-risk clients, then it is clearly time that much more stringent oversight was brought to bear on them. It is not before time, these institutions have a long time to get used to the effect of the regulations. However, it seems not to have mattered one iota.

'... Three quarters of the banks in our sample failed to take adequate measures to establish the legitimacy of the source of wealth and source of funds to be used in the business relationship. This was of concern in particular where the bank was aware of significant adverse information about the customer’s or beneficial owner’s integrity...'

How might we begin to describe this kind of response to regulation? Is it merely an accident, or perhaps just coincidence?

Difficult to maintain that kind of argument in the face of the statistics. No, the answer is the same old typical arrogance which has been demonstrated by so many financial institutions towards financial regulation ever since the days of the South Sea Bubble.

You doubt my memory?

After the South Sea Bubble in 1720, Parliament passed legislation outlawing the short-selling of stock. Did this stop the boys in the City from doing it? No, of course not, except now, they could not write down their deals for fear of providing evidence of short-selling. So they had to stand by their verbal agreements. Hence the motto of the Stock Exchange 'My word is my Bond'.

Many people think this phrase is proof-positive of integrity and honest dealing, when in reality it is the proof of a thieves charter!

No, it's just good, old-fashioned arrogance, borne out by the observation made by the FSA;

'... At a few banks, the general AML culture was a concern, with senior management and/or compliance challenging us about the whole point of the AML regime or the need to identify PEPs...'

How can any regulator possibly deal in a fair and reasonable way with a regulated member who challenges the entire basis of an important piece of legislation? The only way will be to do as the FSA assert at the end of the Summary;

'... We will, where appropriate, use our enforcement powers to reinforce key messages in this report to encourage banks and other firms to strengthen AML systems and controls and deter them from making decisions which do not take adequate account of money laundering risk...'