My friend and co-author Prof Prem Sikka has the following blog on The Conversation website. I share it with permission:
Iceland has sent four former directors of its bank Kaupthing to prison for fraud. But the chances of similar legal action happening in the UK are low, where fraud investigators have a poor record.
The Serious Fraud Office (SFO) is the main agency for investigating and prosecuting major fraud. It was formed in 1988 after a spate of high-profile cases. A government-sponsored inquiry into share price rigging at Guinness in the 1980s concluded that too many executives at major corporations had a “cynical disregard of laws and regulations … cavalier misuse of company monies … contempt for truth and common honesty. All these in a part of the City which was thought respectable”.
But rather than changing corporate laws, amending personal liability of directors, or creating an effective enforcement agency, the government created the SFO.
Last week, the SFO's case against businessman Victor Dahdaleh collapsed because at the last minute it could not provide evidence of alleged graft. This is not the only case the SFO has botched. It spent between £25-40m investigating price-fixing by pharmaceutical companies supplying the UK's National Health Service (NHS), but the case collapsed because of errors in the interpretation of law.
Previously, the SFO was very slow in taking action against BAE Systems over allegations of corrupt practice. The SFO mislaid 32,000 documents relating to the case. It is currently facing a lawsuit for damages from the Tchenguiz brothers after dropping a three-year investigation into the collapse of Icelandic bank Kaupthing.
In 2012-13, the SFO brought 12 cases covering 20 individuals, eventually securing 14 convictions and recovering £11.4m from fraudsters. But it rarely went after the bigger beasts. Money laundering and sanctions busting by British banks did not appear on its radar. The SFO has hardly been visible in investigating and prosecuting the misdemeanours of bankers who brought the UK economy close to collapse.
In mitigation, it might be argued that the SFO's failures are the outcome of the politics of government cuts. In 2008-09, the SFO had an investigations and prosecutions budget of £52m. Despite the banking crash, LIBOR rigging and other scandals, the UK government has drastically reduced SFO's resources.
For 2013-14 its budget is £30m and will decline to £28.8 million for 2014-15. That is a cut of over 44% since the start of the global financial crisis.
Faced with a reduced budget and pay freezes, the SFO has been losing experiencing staff and outsourcing a lot of its legal work, often paying very high fees. Such practices make it difficult to build in-house expertise and an institutional memory.
Other countries seem to assign higher priority to fraud investigation. The US equivalent, the Securities and Exchange Commission (SEC), has an annual budget of US$1.674 billion (about £1.1 billion). It is therefore in a far stronger position to take on the bigger beasts. The SEC has its shortcomings, but it is more likely to get a result than the SFO.
The SFO's failures are indicative of Britain's failure to build durable and effective institutional structures to fight financial crime. Rather than a single powerful and well resourced agency, there is an ineffective patchwork of institutions.
These include the Financial Conduct Authority (FCA), the Office of Fair Trading (OFT), The National Crime Agency (NCA) Her Majesty's Revenue and Customs (HMRC), the Crown Prosecution Service , the London Stock Exchange and the Financial Reporting Council, to name just a few. The overlapping and often unclear boundaries result in duplication, waste, obfuscation, delays, poor accountability and outright failures.
Any effective fight against globalised financial crime needs to streamline its institutional structures. In the age of globalisation the UK cannot fight financial crime on a shoestring, with puny organisations. Large parts of the patchwork should be replaced by a UK equivalent of the SEC.
But a new organisation would not be able to combat wealthy elites or giant corporations without significant resources. This might be expensive, but it is an investment that would pay off.
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This is surely deliberate. UK governments do not want the criminality in the city exposed the the Courts….where would it end. In the US it would seem that a new technique is developing whereby a corporation against whom claims of misconduct are made counter sues to essentially threaten the often minnow attacking it with its legal corporate strength. This drives other potential claimants back into their shells. Another sign that governments are for corporations and not for citizens.
Interesting point re the number of agencies. While the SEC is a powerful regulator with broad scope there are plenty of other regulators who fight over turf. An excellent example is the Standard Chartered case, where the newly created Department of Financial Services under Benjamin Lawsky pushed the most extraordinary outcomes, including a personal apology from the chief executive from Standard Chartered for sanctions breaches which were later revealed to be not as serious as alleged and in any case, were instituted in complete disregard of the more nuanced settlement being negotiated by the DOJ and others. Needless to say it did not seem to have much of a deterent (except giving support to those who believe US authorities like to target UK institutions).
In any case the UK did have a super-regulator until recently which was quite well resourced, being the FSA and it was broken up because it failed utterly during the 2007 Financial crisis. The solution probably lies elsewhere than just the regulatory architecture.
According to Rowan’s Blog, Rowan Ashworth-Davies our lovable Dob Diamond is back in town, this time embarked on African financial matters. Buy shares in Oxfam.
The almost total silence in the mainstream UK press (notably the Daily Telegraph and the Times) over last week’s convictions in Icelandic is deafening and very telling.
It’s hard not to concur with the comments by Tony Shearer (ex-CEO of Singer & Friedlander prior to its disastrous take-over by Kaupthing in 2005) in response to Sigrun Davidsdottir’s pertinent question “Why are bankers investigated in Iceland and not so much elsewhere?” on her excellent Icelog: http://uti.is/2013/12/why-are-bankers-investigated-in-iceland-and-not-so-much-elsewhere/
I quote:
“We know that in the UK the Serious Fraud Office has a catastrophic record, but it seems clear that the political will simply does not exist to make these prosecutions. The UK banks and the 4 big accounting firms have effectively corrupted the politicians, regulators, and civil service. They have so placed their partners and former partners into the system, and their level of lobbying, secondments, and work that they do for these people is so great that they have undue influence. It seems to me that, as a result, the Chancellor of the Exchequer and the UK Prime Minister as well as the heads of the UK regulatory bodies and the civil servants regularly make the wrong decisions.
We will continue to have scandals involving the UK banks until such time as the senior politicians and senior civil servants clear out from the system those people in the banks and major accounting firms who have the wrong legal and moral attitudes.
The Chancellor, supported by the Prime Minster, has hung a large sign over the City of London to say that we are open to business for crooks and those with low morals. Iceland has hung out a sign to say the opposite. By the actions of the Icelanders and the inactions of the UK, the undesirables will avoid Iceland and chose London.”
In other words – to borrow the title from another of Richard’s blogs (in that case re tax evasion – it “happens because powerful people permit it …”. http://www.taxresearch.org.uk/Blog/2013/12/18/tax-evasion-happens-because-powerful-people-permit-it-those-powerful-people-are-called-bankers-and-accountants/