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!
