22 Jun 2017
In 2010 I started what I thought would be a four year research project on the 2008 financial crisis and its association with financial crime. The more research I conducted, the more convinced I became that financial crime was a key causal factor in the crisis. In 2014, the research project was published as a monograph by Edward Elgar, entitled The Financial Crisis and White Collar Crime: The Perfect Storm?. The book identified several types of financial crime that contributed towards the financial crisis, including mortgage fraud, misleading actions of Credit Rating Agencies, predatory lending, Ponzi fraud schemes, market misconduct and market manipulation.
One of the other key findings of the book was that there was a distinct lack of criminal convictions in both the United States and the United Kingdom. This was somewhat surprising given the usually robust response to financial crime in the United States—a point clearly illustrated by the record number of convictions and custodial sentences imposed as a result of the Savings and Loans Crisis in the 1980s, and following the collapse of both Enron and WorldCom.
The response of law enforcement and regulatory agencies in the United States and the United Kingdom to financial crime associated with financial crisis has been the imposition of a large volume of uninspiring financial penalties. Within the United Kingdom, the Financial Conduct Authority (FCA), as part of its ‘credible deterrence’ strategy, continues to impose financial penalties on numerous firms. The most obvious examples are those levied on members of the financial services sector for the rigging of LIBOR and FOREX. The impact of imposing large financial penalties was heralded and applauded by the FCA as examples of its tough stance of financial criminals: in 2014, for example, FCA fines totalled £1.4bn. But these figures are essentially insignificant compared to the fines imposed in the United States. The highest of these, imposed by the United States Department of Justice, was $16.65bn on Bank of America, for fraud in the run up and during the financial crisis.
Additionally, in response to the association between financial crime and the financial crisis President Barak Obama introduced the Fraud Recovery Act 2009, the only legislation that recognises the association between the financial crisis and financial crime. But the results of the additional funding granted to the Department of Justice and the Federal Bureau of Investigation are questionable.
In the United Kingdom a number of traders have been convicted for conspiracy to defraud; the highest profile conviction was Tom Hayes, who was originally sentenced to 14 years imprisonment, reduced to 11 years on appeal. This was an important result for the heavily criticised Serious Fraud Office (SFO), which had been threatened with abolition by both the Coalition and Conservative governments. Since the conviction of Tom Hayes, the SFO has continued to flex its muscles as a result of new powers granted under the Crime and Courts Act 2013. For example, it has imposed a number of deferred prosecution agreements on Standard Bank, XYZ, Rolls Royce and Tesco. But it is generally accepted that under current legislative provisions it is very difficult to instigate criminal proceedings for financial crime against companies.
In response to these difficulties the Conservative government published a consultation paper on corporate liability for economic crime in early 2017. And yesterday, the SFO announced that it had charged four former Barclays executives and Barclays Plc with fraud, in relation to behaviour during the 2008 crisis. The former executives have been charged with a variety of offences under the Fraud Act 2006 and the Criminal Law Act 1977. Barclays Plc has been charged with unlawful financial assistance contrary to s.151 of the Companies Act 1985. As a result of these charges, the FCA has reopened its investigation into Barclays following the imposition of a £50m fine, which the bank has contested. This represents an unprecedented action by the SFO and it is the first time that criminal charges have been brought against a UK bank as a result of conduct that occurred during the financial crisis. If the case does go to trial there will no doubt be fascinating revelations about the operations of one of the UK’s largest banks during the height of the 2008 crash, and the case would likely become a trailblazer for further prosecutions.
Dr. Nicholas Ryder is professor of Financial Crime at Bristol Law School, part of the faculty of Business and Law at the University of the West of England.
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