07 Jun 2017
Hidden among the pledges in the Conservative manifesto for the 2017 UK general election was a topic that parties often don’t mention. “We will strengthen Britain’s response to white collar crime,” it states, by “incorporating the Serious Fraud Office into the National Crime Agency, improving intelligence sharing and bolstering the investigation of serious fraud, money laundering and financial crime.” The response has been negative. Specialist Financial Investigator Tom Devlin wrote for KYC360 that the pledge was “counterproductive”, adding that “the government’s timing could hardly be worse”.
This, however, obscures a wider point: despite several high-profile scandals and prosecutions in recent years, financial crime does not appear in either the Labour or Liberal Democrat manifestos. Even the financial crisis failed to direct political attention at the problem: the 2010 and 2015 manifestos were concerned primarily with financial reform, rather than prosecuting criminals. This seems odd given that financial crime reportedly costs the UK economy £52bn every year. Moreover, research both from the 1980s and more recently, from 2008 (before the global financial crisis), evidences broad support for harsh punishment for financial crime. Is there a gap in the electoral market?
On the one hand, perhaps not. Many of the scandals KYC360 has covered recently have failed to capture public imagination. From ‘mirror trading’ at Deutsche Bank to the Tesco accounting scandal, headlines are held for a day or two but little is proposed by politicians in response. Even allegations of the implication of the Bank of England in the vast LIBOR rigging scandal, which broke just a week before this election was called, elicited only a single call from the Shadow Chancellor for a full inquiry.
The problem may be that there isn’t actually a great deal that can be done in terms of legislation. The brand new Criminal Finances Act makes some important changes, but the biggest issues in financial crime prevention relate to enforcement. It’s notable that the Conservative manifesto pledges changes to the process of investigation and prosecution rather than changes to the law. Without evidence of strong public feeling, and in the absence of a clear policy change to pledge in a manifesto, a tougher stance on financial crime is not an obvious vote winner.
But, in a wider sense, perhaps it could be. Two case studies serve to illustrate this. First, the initial response to LIBOR rigging in 2012 may be instructive: the scandal dominated the headlines for weeks and resulted in a significant response, including fines of billions of dollars around the world. LIBOR was brought under the scrutiny of the FCA and the act of making false statements in relation to benchmark-setting was made a criminal offence (over and above the existing crime of fraud). However, the impact of LIBOR-rigging was hard to put a figure to. Various municipalities in the US filed lawsuits to recover funds they claimed to have lost due to the manipulation of the rate, but whilst traders’ gains were manifest, the losses they caused, generally, were nebulous.
But this ‘diffuse costs’ problem doesn’t apply to all financial crimes. The Madoff Ponzi scheme was the largest financial fraud in US history. The $64.8bn fraud didn’t just hurt saving schemes and charitable foundations: several suicides were traced directly to enormous losses incurred by the collapse of the scheme. Madoff was sentenced to 150 years in prison and, although his co-conspirators received much lighter sentences, justice is generally seen to have been done, particularly after the American Internal Revenue Service announced a tax relief scheme allowing for losses to Madoff to be written off as theft losses rather than capital depreciation. Similarly harsh sentences were doled out in the wake of the Enron collapse in 2001.
These contrast very strikingly with the fallout from the wider 2008 economic crisis, which precipitated the unravelling of Madoff’s Ponzi scheme. Despite the worst financial crisis in almost a century inflicting horrendous damage on Western economies, only one Wall Street executive was imprisoned for his role in the Great Recession. Dozens of financial professionals were put behind bars, but most were from smaller or regional American banks. In the UK, not one even went on trial. Judge Jed Rakoff of the Southern District of New York—i.e. Wall Street—concluded in the New York Review of Books that “if … the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years. Indeed, it would stand in striking contrast to the increased success that federal prosecutors have had over the past fifty years or so in bringing to justice even the highest-level figures who orchestrated mammoth frauds.”
Some commentators have traced the series of political shocks in the UK and US over the last few years to this failure of catharsis. The response in the UK and US has also frequently been compared to that in Iceland. The Icelandic economy was utterly devastated by the crash but has rebounded enormously over the last few years. The recovery process encompassed permitting insolvent banks to default, introducing capital controls, and—yes—jailing bankers (several dozen at the last count). “I do not think we would be able to establish faith and trust in the system without this being dealt with,” Olafur Hauksson, who was appointed Iceland’s special prosecutor for financial crime in 2009, told the BBC World Service in February 2016.
Perhaps the lesson to be drawn is not simply that voters do not care. After all, financial crimes are enormously complex and often seem only to affect other rich people; it takes expertise to even follow the events, let alone get angry about them specifically. What is important is that (criminal) justice is seen to be done, and that an idea of financial professionals as being above the law is not allowed to take root. Although there are undoubtedly severe practical difficulties with prosecuting scores of bankers for their part in the catastrophe of 2008, it is easy to see how a more severe prosecutorial response might have curtailed some of the rippling anger across Western democracies. When Donald Trump bashed Hillary Clinton for her Wall Street donors and speeches, the sting might have been drawn a little if more bankers were convicted alongside Madoff.
Richard Nicholl (@rtrnicholl) is Legal Editor for a leading provider of corporate legal intelligence. He also works as a freelance political commentator and investigative journalist.
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