The Financial Crisis and White Collar Crime - Legislative and Policy Responses

A Critical Assessment

Nicholas Ryder, Umut Turksen, Jon Tucker

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781317311737
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

This book offers a commentary on the responses to white collar crime since the financial crisis. The book brings together experts from academia and practice to analyse the legal and policy responses that have been put in place following the 2008 financial crisis. The book looks at a range of topics including: the low priority and resources allocated to fraud; EU regulatory efforts to fight financial crime; protecting whistleblowers in the financial industry; the criminality of the rogue trader; the evolution of financial crime in cryptocurrencies; and the levying of financial penalties against banks and corporations by the US Department of Justice and Securities and Exchange Commission.

1 Introduction

Nicholas Ryder, Umut Turksen and Jon Tucker

In September 2007, the collapse of the United States (US) sub-prime mortgage market resulted in the global meltdown of the financial markets. This in turn led to the collapse of many international financial institutions including Northern Rock, Bradford and Bingley, American Insurance Group, Freddy Mac, Fannie Mae and Lehman Brothers. The G20 countries responded with a plethora of financial stimulus packages aimed at combating the largest global financial problem since the Wall Street Crash in October 1929 and the Great Depression. Many commentators, regulatory agencies and politicians have argued that the financial crisis was the result of numerous interrelated factors which resulted in nation states introducing a raft of legislative measures to protect their economies.

However, the purpose of this collection is to highlight the impact of another, perhaps even more significant, trigger event – financial crime. There is an increasing amount of evidence from the Federal Bureau of Investigation (FBI), the Securities and Exchange Commission (SEC), the Financial Conduct Authority (FCA) and the Serious Fraud Office (SFO) which highlights the increase in financial crime. Therefore, the aim of this collection is to provide a unique commentary on the response to white collar crime since the financial crisis. It seeks to contribute to this vast area of law by providing a unique review from a wide range of experts from academia and practice. The collection is based on a series of papers that were presented at a one-day conference that was held at the University of the West of England Bristol in July 2014 on the legislative and enforcement responses to white collar crime and the financial crisis. It seeks to build on the earlier findings of Fighting Financial Crime in the Global Economic Crisis, published in November 2014, which identified the link between the 2008 financial crisis and white collar crime. In the first edited collection for the Law of Financial Crime series, the contributors attempted to illustrate the link or association between the most recent financial crisis and financial crime. That edited collection presented a significant amount of evidence that suggested that financial crime was at least a contributory factor. Since its publication, an impressive array of scholars and commentators have conducted research on the association between the financial crisis and financial crime.¹ However, it is important to note that not all commentators would agree that financial crime was a factor that contributed towards the financial crisis.²

Contents overview

Chapter 2 of this collection is written by Professor Mark Button and Dr Martin Tunley and is entitled ‘The 2008 financial crisis and fraud: the roles of immoral phlegmatism, deviancy attenuation and de-labelling’. Here the authors argue that the extent of fraud that has been uncovered since the financial crisis and the scale of the damage done would lead some to believe that many should be held to account through the most serious sanctions the state has to hand, criminal prosecution. The reality, however, is that in criminal terms, at least, the financial institutions and persons responsible have not been held to account. This chapter argues that there is a variety of reasons to explain this, and will use new counter theories such as de-labelling, deviancy attenuation and immoral phlegmatism as the lenses through which to explore these events.³ This chapter begins by briefly outlining moral panics, deviancy amplification and labelling, the theories these counter-theories are built upon, before using the example of benefits fraud in the UK, which, it is argued, fits with many of these well-established theories. The chapter will then set out the counter-theories: de-labelling, deviancy attenuation and immoral phlegmatism, and then use the financial crisis of 2008 to explore them.

In Chapter 3, Dr Alison Lui uses a combination of the doctrinal approach and interview data. The interview data consists of two former employees of HBOS and Lloyds TSB. The first interviewee is Paul Moore, the former Head of Regulatory Risk at HBOS (2002–2004). The second is Ian Taplin, a former employee in the Wealth and Private Bank of Lloyds TSB (2005–2010). The chapter demonstrates that banks such as HBOS and Lloyds TSB did not pay sufficient attention to consumer protection. The pursuit of profits by such banks prevailed over consumer protection. Although legislation and FSA guidelines prior to the financial crisis highlighted the importance of consumer protection, it will be demonstrated that they were insufficient. Subsequent reforms in the law have improved protection given to whistle-blowers in the financial industry, but corporate governance is still the driving force behind changing the culture of organisations. Whistle-blowers can play an important role in improving corporate governance due to the information asymmetry problem in the financial sector. Whistle-blowers did not prevent the scandals linked to the financial crisis of 2007–2009,⁴ but they have contributed towards more regulatory intervention as a result of exposing weaknesses in corporate governance and regulation.⁵ They thus play important roles in uncovering financial misconduct in Potemkin villages.

Chapter 4 is written from a practitioner’s perspective by Professor Paul Keenan and is entitled ‘Rogues in the City’. In this chapter, Professor Keenan concentrates on rogue traders and the question of criminal intent and concentrates on a number of cases studies including that of Jerome Kerviel. Chapter 5 has been written by Dr Dionysios Demetis, who seeks to examine the role of information systems (IS) in creating financial instability by automating critical decision-making processes. By following a systems theoretical approach by Lee and Demetis⁶ and based on a few fundamental systems principles, the chapter identifies theoretical propositions about the nature of technology in constructing financial markets, and by extension, financial crises. The chapter draws from a few instances of the Dow Jones Industrial Average crisis of 2010, also known as the Flash Crash of 2:45 where $1trillion was lost in market value within a few minutes. This is used as an example of technology out of control, where algorithmic trading creates contingencies that affect how different stakeholders interact and react. Based on the entanglement of systems principles and technological interference, the main hypothesis developed in this chapter is that technology is largely set to lead in the creation of future instabilities and amplify the degree of uncertainty in markets. Ultimately, this aims to highlight the broader role of technology in the financial system, not as a tool that can be strictly harnessed to support transacting, but as a system in itself that has both emergent and unintended consequences, one of which escalates to the concept of a financial crisis.

Chapter 6, by Professor Jon Tucker, examines the financial crisis and financial crime from a finance industry perspective. It explores the structure of the industry, the instruments traded and the role of the key players in an attempt to understand the basis for their interactions and the motivations for individual actions. The chapter explores the central importance of financial markets and institutions to a successful economy and society, and seeks to understand the inherent institutional challenges around scale, complexity and information asymmetry. The chapter goes on to consider the incentives of key players and the possible causes of things ‘going wrong’, such as systemic problems, poorly designed incentive structures, negligence, lack of training, unforeseen circumstances and, of course, criminal activity. Finally, the chapter examines how key actors in the finance industry such as regulators, financial institutions and professional bodies have set in place systems and approaches around not just compliance but also integrity and ethics in an attempt to reduce the possibility of a similar crisis in the next decade. In brief, the chapter underlines the importance of the finance industry, the imperative for balanced discussion of the issues around financial crime, the central role of integrity and ethics in modern institutions, and an end to ‘banker bashing’.

In Chapter 7, Andrew H. Baker assesses how the market abuse regime of the Financial Services and Markets Act 2000 attempts to deal with the risk posed to financial markets by the misuse of information by market participants. The chapter analyses the risks posed by the misuse of information, with some focus on insider dealing under both the civil and criminal provisions. The purpose is to assess whether the regime in its amended form is capable of ensuring that the UK financial markets are free from abusive practices and continue to operate in a fair and open manner.

Chapter 8, by Daniel Jasinski, offers an alternative stance on the response to the financial crisis, in which he seeks to analyse the Financial Conduct Authority’s approach to regulating the market from a consumer protection perspective. The chapter provides an analysis of the Consumer Credit Act 1974, and in particular the elements that can be invoked by consumers in order to seek redress for harm caused to them by financial institutions. The next section reflects on the powers and performance of the Office of Fair Trading and compares it with the Financial Services Authority. The chapter pays particular attention to predatory lending and other illegal lending mechanisms, and draws comparisons with the United States of America.

In Chapter 9, Professor Andrew Haynes concentrates on money laundering and provides a summary of the manner in which the law has developed, and is continuing to develop, and its causes. The chapter then moves on to concentrate on market abuse and insider dealing. The final part considers the quandary that this has created. Is the role of such laws and regulations to combat crime effectively, or is it to look as though something is being done, when in effect little is? Is there an alternative approach, and, if so, what is it?

Chapter 10, by Rhian Dow and Professor Umut Turksen, comments on whether and to what extent accountants and auditors in the EU are protected when they blow the whistle and report suspicious (financial crime) activity in the context of money laundering. In the confines of this chapter, it is not possible to consider all Member States of the EU. Rather, the authors have chosen several Member States in a hope to depict the general state of affairs across the EU and highlight the main differences therein.

In Chapter 11, Dr Gauri Sinha seeks to answer a number of important questions, including: Has a stricter regime led to more effective regulation in financial crime? The answer lies in the analysis of the ‘credible deterrence strategy’ followed by the Financial Conduct Authority in the United Kingdom that has led to an inefficient ‘comply or explain’ approach on the part of the regulated sector. The chapter argues that a move towards this tougher regulation is purely cosmetic and encourages regulated entities to follow a ‘tick-box’ approach. The underlying objective of the author is to counter the belief that excessive regulation leads to more efficient compliance of financial crime laws, and therefore a more stable financial system. Looking at the crisis from the other side of the coin, why are individual prosecutions almost non-existent? Contributory factors such as a lack of resources within law enforcement agencies may give part of the answer; however, the author contends that it is definitely not the most crucial factor. In analysing the above issues, the focus of the chapter remains the United Kingdom; however, in discussing the financial crisis and the (lack of) prosecutions, it is inevitable to traverse through the reaction of law enforcement to the issue of corporate accountability in the United States.

In Chapter 12, Dr Axel Palmer critically assesses the response of the United States of America to financial crime, a key component of the financial crisis. This chapter begins with the issues faced by President George W. Bush in the closing months of his administration, moves on to examine the response of President Barack Obama, and then considers how the Department of Justice and the Securities and Exchange Commission undertook their roles to supervise, regulate and protect consumers and individuals from financial abuse.

In Chapter 13, Chris Recker seeks to discuss and critically assess the role of the National Crime Agency and the wider battle against financial crime. This chapter first provides an overview of the legislative framework that governs fraud, money laundering, bribery and corruption, and then introduces the regulators and law enforcement agencies of financial crime in the United Kingdom. This chapter then considers the future of fraud, money laundering and bribery, and corruption regulation. The chapter concludes with a balanced commentary on the success of the National Crime Agency and the extent to which it has impacted the United Kingdom’s financial crime policy.

In the final chapter of this collection, Dr Sarah Wilson seeks to draw inspiration from how the financial crisis has produced a rich and voluminous academic commentary on the ‘first crisis of globalisation’. It also takes its lead from how academic scholarship on the financial crisis is also exhibiting burgeoning interest in exploring connections between financial crises and financial crime. Within this emergent body of literature, identifiable focal points are already readily apparent, with interest concentrating centrally on how financial distress and instability provide a context for financial impropriety, which occurs in violation of criminal law, such that it is precipitating debate on the adequacy of existing criminal liability. This discernible academic interest in associations between the financial crisis and financial crime is also readily apparent in UK debates on regulatory reform alongside commentary responses, and this chapter draws extensively on both. In focusing particularly on the apparent significance of criminal enforcement in current discourses, the chapter considers current perceptions of in/adequacy, linking these closely with normative questions arising from what role the criminal law should have in promoting propriety within financial systems, as these are seen by academics and regulators alike. Two key academic studies help to frame this discussion, one of which has been written more generally around the financial crisis, with the other being more specifically focused on financial crime. The chapter explores the lexiconic qualities of Reinhart and Rogoff’s ‘“this time is different” syndrome’ and Friedrichs’ thesis of ‘transformative understandings’ of crime, regarding them as invaluable tools for analysing the current state of play. Both works are also used to explain how the interactions between financial crises and financial crime can be analysed historically, with the chapter also pointing to the manifest importance for the current context of them being so.

Notes

1 See, for example: R. Tomasic, ‘The financial crisis and the haphazard pursuit of financial crime’ (2011) Journal of Financial Crime 18(1), 7; N. Ryder, The Financial Crisis and White Collar Crime: The Perfect Storm? (Cheltenham: Edward Elgar, 2014); N. Ryder, U. Turksen and S. Hassler (eds), Fighting Financial Cr...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Notes on contributors
• Acknowledgements
• 1 Introduction
• 2 The 2008 financial crisis and fraud: the roles of immoral phlegmatism, deviancy attenuation and de-labelling
• 3 The importance of whistle-blowers in uncovering financial misconduct in Potemkin villages1
• 4 Rogues in the City
• 5 The systemic role of technology in financial instability
• 6 The finance industry perspective
• 7 Market abuse and the risk to the financial markets
• 8 The FCA: protecting consumers of the consumer credit market in the wake of the global financial crisis
• 9 Legislation and regulation in response to financial crime – pursuing ghosts?
• 10 Independence and protection of auditors in the EU anti-money laundering framework
• 11 Post-crisis regulation and prosecutions in financial crime: progress or paradox?
• 12 The financial crisis and its relationship with white collar crime in the United States of America: time for the Feds to fight back?
• 13 The National Crime Agency: a critical analysis of its potential impact on the UK’s financial crime policy
• 14 Financial crises and financial crime: ‘conscious coupling’ and ‘transformative understandings’ of crime past, present and future
• Index