People, not just companies, must pay for financial crime
By Rebecca Lowe
The accusation by the New York State Department of Financial Services that Standard Chartered breached US sanctions on $250bn of Iranian transactions – robustly denied by the bank – has reignited debates about the need for stronger City regulation and oversight.
Some believe the charge is little more than grandstanding by a minor watchdog with political ambitions beyond its station, pointing out that two former New York regulators who went after Wall Street, Eliot Spitzer and Mario Cuomo, went on to become state governors. But when taken alongside the recent Libor and money-laundering scandals at Barclays and HSBC respectively, and the serious failings by banks in the sale of interest rate hedging products, the overall picture of London’s financial sector is far from rosy.
Justice Secretary Ken Clarke has said he believes financial crime is ‘easier to get away with in this country than practically any other crime’, and public anger is clearly growing. A recent survey by Which? showed that 78 per cent of people want individuals prosecuted where banks have broken the law.
Ros Wright, chair of the Fraud Advisory Panel and former director of the Serious Fraud Office (SFO) agrees. Prosecuting people rather than companies should be a priority under new SFO director David Green, she believes, as this is a greater deterrent – and fines are not ultimately paid by the guilty parties but by shareholders. ‘The people commit the crimes, not the company,’ she says. ‘Fining companies is a deterrent, but if you send the directors from Barclays to prison, that is an even bigger deterrent.’
The SFO is under pressure to get results more than ever.
Prosecuting a company is also extremely difficult, Wright points out, as you need to prove wrongdoing by the ‘guiding mind’ of that company, which more often than not is the board of directors. ‘How often can you prove the board was sitting around a table plotting to do something criminal?’ she asks. ‘You can’t.’
The SFO is currently under pressure to get results more than ever. Under Richard Alderman, who stepped down in April, large, complex cases – such as BAE, doggedly pursued under Robert Wardle’s tenure– were abandoned in preference for quick wins and deals with companies. Under Green there are high hopes it will regain the prestige, expertise and morale it has lost. He has already vowed to ‘rebalance the relationship between prosecution and civil settlement’, and has announced plans to investigate the Libor scandal – an investigation begun in the US a year ago, but never picked up in the UK – and continue investigating property entrepreneur Robert Tchenguiz. The original case against Tchenguiz and his brother Vincent collapsed after the High Court ruled that search warrants had been obtained on the back of ‘unfair and inaccurate’ information.
One frequently criticised tool in Alderman’s armoury was the civil recovery order, employed to settle cases quickly and cheaply. Both the UK’s judiciary and the OECD voiced concerns with the SFO’s reliance on such orders, believing them to undermine justice and lack transparency. Julian Parker, SFO senior operational investigator from 1996 to 2009, agrees. ‘There is an essential point of public policy here,’ he says. ‘Do we wish to live in a society where well off criminals can buy themselves out of trouble within the criminal justice system […] or should they be pursued, routinely, with the full force of the law?’
‘A priority should be getting [...] prosecutors with commercial experience in the fraud area [...] They understand the commerical realities.'
Director of the Serious Fraud Office, 2003–2008
With budget cuts of 25 per cent, Green faces an uphill struggle to revolutionise the office and attract experienced staff – a perennial difficulty given the more attractive private sector salaries on offer. Corporate crime remains a low government priority, and fraud squads across the country have slowly disappeared. It is hoped that by repairing the SFO’s credibility, lawyers will be encouraged to cut their teeth as public prosecutors before entering private practice, as is the tradition in the US. Green has also suggested ‘borrowing’ people on secondment from the Financial Services Authority (FSA) and the private sector.
‘A priority should be getting prosecutors with experience,’ says Robert Wardle, director of the SFO from 2003 to 2008. ‘It would be good to get people with commercial experience in the fraud area – maybe ex-revenue or customs investigators. They understand the commercial realities.’
Better cooperation between the FSA and SFO is imperative if both organisations are to work effectively, says Matthew Cowie, corporate investigations counsel at Skadden and former SFO prosecutor. ‘Perhaps until recently there has been a long history of close cooperation,' he says. 'However, with proposed reorganisation, regulators are jostling to define their position in the regulatory landscape and justify their existence and remit.'
There is room for both large criminal cases and settlements, Cowie believes. His investigations between 2004 and 2010, which included BAE Systems and Mabey & Johnson, usefully paid for themselves. ‘Corporates can be a great vehicle for change and self-regulation, and effective enforcement action will always have an effect on the target and the watching corporate world. However, most effective regulators know that without going after individuals and pursuing the long, hard cases, you cannot have credible deterrence.’
Richard Alderman could not be reached for comment.