Is the financial industry facilitating crime?

World Finance discusses with Stephen Platt, author of Criminal Capital, whether those in the financial industry are facilitating crime

January 12, 2015

In 2008, the world became all too aware of the problem of excessive risk taking, but at least as pernicious in financial services is the role the industry has played in facilitating crime. So says Stephen Platt, the author of Criminal Capital, and one of the leading experts on financial crime prevention, who joins World Finance.

World Finance: Well Stephen, the financial industry facilitating crime, that sounds sensational. How much truth is there in it?
Stephen Platt: It’s very very important in the post-2008 analysis that we recognise that the facilitation of crime by the finance industry is causally linked with the effects essentially of the financial crisis. What we essentially see is a spectrum of conduct within financial services.

On the one hand we’ve got excessive risk taking, and what’s emerged since is mis-selling, rate rigging, sanctions evasion, money laundering and criminal facilitation. And they’re all causally linked. The reason that it’s so important for us to focus more than we have done in the past on criminal facilitation, is because that really represents the most egregious of the activity of the industry.

[T]hey are not educated in how to run a bank in the 21st century

World Finance: So how exactly is it linked and where are the vulnerable spots?
Stephen Platt: Because of what I would regard as a lack of professionalism in the stewardship of financial institutions. We’ve got people sitting on the boards of systemically important banks, for example, very competent lawyers, very competent accountants, very successful businesspeople in their own right, but they are not educated in how to run a bank in the 21st century.

World Finance: So facilitating crime, how much of this is done consciously?
Stephen Platt: The vast majority of it is done unwittingly, and it’s the product partly of incompetence, partly of a conscious decision to turn a blind eye, partly because of a misconception about the vulnerability of the industry, and therefore one’s particular financial institution, to criminal abuse.

One of my contentions is that the model of money laundering, for example, that the financial service industry relies upon because government policy makers tell them to rely on it, is fundamentally flawed. The traditional placement, layering and integration model of money laundering is far too transaction based to enable the industry to identify circumstances in which it is being abused actually in the facilitation of predicate crimes.

World Finance: Can you give examples of large corporations that have been caught up in this?
Stephen Platt: Let me give you an illustration. A corrupt politician in east or west Africa wants to award a large contract. Let’s say it’s an arms contract. A number of corporations around the world would like that business. It’s a significant contract. The politician concerned wants to have his palm greased. He is not going to take that money from the bribe paying corporation directly and nor is the bribe paying corporation going to be prepared to give him a bribe directly.

Instead, what they’re going to do is that they’re going to set up some sort of off-balance sheet structure, in the form of trusts, foundations, corporations, which are administered by the financial services industry, and banked by the banking industry. That structure is going to pay a some of money to a similar structure which is administered and banked on behalf ultimately of the corrupt politician.

The payment that goes between those two bank accounts is dressed up as being a payment that represents a sum of money in respect of a consultancy arrangement, or an agency agreement. Of course, that’s entirely fictitious.

What we’ve got is the payment of a bribe, made up to look like something that it isn’t, and that act of predicate criminality, the bribe payment, has been facilitated through the provision of financial services by the finance industry.

World Finance: Well we are talking about risk management, which is all about cost-benefit analysis, so surely a few bad apples is acceptable?
Stephen Platt: I accept that this is not an exact science, and I accept that irrespective of the investment that the industry makes, there are always going to be problems of this type, and let me make it absolutely clear, there are very many people within the financial services sector who are committed to the prevention of financial crime and not its facilitation, but I think that a lot of the investment that’s made could be applied better.

World Finance: Well what’s the solution then, surely not more red tape or regulation?
Stephen Platt: We don’t need more red tape, this is a fundamental problem. Every time we have a crisis, government reacts by introducing more rules. We don’t need more rules.

What we need is for regulators and prosecutors to develop a bit more stomach

What we need is for regulators and prosecutors to develop a bit more stomach, and to utilise the tools that they already have at their disposal to bring people to book. We need to see more of that, and where we need to see it in particular is in relation to senior individuals of financial institutions, who are responsible for the environments in which employees feel able to behave in the way that they clearly have been behaving in the course of the last 10 years.

It’s all very well prosecuting an individual trader, but we need to take a step back and say, ‘yes if we prosecute that individual, that’s fine, it makes great headlines, but does that actually represent an enforcement success that is going to change the behaviour and the culture of that institution moving forward?’ I would suggest that the answer to that is no.

World Finance: Putting aside what the media say, the financial industry has been turned inside out since 2008, and the crash of course. So really more needs to be done?
Stephen Platt: I think that we’ve been as it were tinkering with the edges. I don’t want to undermine the steps that have been taken, I think that some of them are positive steps. But I don’t really think that they go far enough.

Let me give you an example. In 2008, the financial crisis blew. We had obviously a global post-mortem analysis on that, which frankly we’re still going through. If we fast-forward six years to today, several banks were fined over $2bn in respect of LIBOR rigging. The facts show that some of that rigging activity was taking place up to four or five years after the financial crisis.

So when we look at LIBOR through a narrow optic, we think that that’s an enforcement success. But if we look at it through a wider optic, it’s actually a story of enforcement failure, as well as failure of internal governance within the financial institutions concerned. Because, for some of them, the most senior officials within those organisations post-2008, must have known that there were fundamental problems.