News

Spiders’ webs

July 30 2020

Last week Parliament’s Intelligence and Security Committee wrote about how Russian oligarchs and their money had been welcomed by the UK from the mid-1990’s onwards, with Britain’s “light touch … regulation” (where have we heard that before?). The UK’s rule of law and judicial system were seen as a particular draw. But, as the report says: “few questions – if any – were asked about the provenance of this considerable wealth.” Oh dear.

The report says that, rather than the encouragement of ethical practices and transparency amongst the Russian investors as hoped, Britain’s institutions provided “ideal mechanisms by which illicit finance could be recycled through what has been referred to as the London ‘laundromat’”. The patronage and influence this money brought to “willing beneficiaries” helped the reputation laundering process. And then there are the enablers, described with some asperity, as those who “on occasion help launder money through offshore shell companies and fabricate ‘due diligence’ reports”. Dear oh dear.

The authorities do have some ways of countering this: Unexplained Wealth Orders, for instance and seizure of assets. How well these work is another matter, of course. The Court of Appeal recently overturned three UWO’s obtained against the family of the former president of  Kazakhstan, now subject to appeal by the National Crime Agency. The NCA may win its appeal but, as stated in the report, there is an imbalance of resources between the NCA and those with the wealth to fight back. And the longer the money is around and channelled through companies, property, trusts, charities and the rest, the easier it is to disguise its original smell and explain it away – enough to fight off the UWO, anyway.

There have been some successes: in relation to the spending (£11 million on a townhouse, £16 million spent in Harrods over a decade) by the wife of a former chairman (and convicted fraudster) of a state-owned bank in Azerbaijan, for instance. Or the seizure by the City of London police of £2 million in cash held in British banks by a professional money launderer acting for the Calabrian mafia, the ‘Ndrangheta, after a two-year investigation.

Three points are worth noting:

  • One of the weakest points of any system is the point of entry. Much easier to keep “dirty” money out than to try and get rid of it once it is in and, over time, made to appear respectable or, at least, explained. Ditto re dodgy individuals.
  • Once in, getting rid of the dodgy individuals and money risks becoming a game of Whack-a-Mole, one which tests the patience and resources of the authorities and requires their relentless and sustained focus.
  • Be wary of those seeking to use the credit and reputation you have built up over years. That applies to professionals as much as it does to countries. It is flattering to think you will teach and improve them. The grubby reality may be that it is your reputation which is tarnished. It’s an old problem: some well-established banks and professionals learnt this the hard way – with one Robert Maxwell back in the early 1990’s. It’s a lesson worth remembering rather than relearning.

One thing is puzzling though. For years – since at least 1994 – there have been money laundering regulations, with the latest iteration brought in last year. The level of information needed is onerous and extensive. The principle underlying all these rules and regulations and the concept of due diligence is that banks and lawyers and estate agents and the myriad of intermediaries should really know and understand their customers and where their money comes from. So how is it that, even now, a couple of Calabrian Mafiosi are able to set up a company that does nothing, give an address where they do not live and deposit £2 million in an English bank account?

Surely it is not because, as reportedly attributed to Anarchasis, a Scythian visitor to 6th century Athens: “Written laws are like spiders’ webs; they catch the weak and poor but are torn in pieces by the rich and powerful.

 

Photo by Bence Balla-Schottner on Unsplash

 

On Leadership and Good Investigations

October 14 2019

It is generally a good idea, when facing severe criticism from an inquiry, not to try and justify the behaviour which has been criticised. No good will come of it: you will look like someone paying lip service to the findings who really thinks you’ve done nothing wrong.

It is advice which the Metropolitan Police singularly failed to follow in their response to the report by Sir Richard Henriques on Operation Midland, the now notorious investigation into alleged child abuse. The day of its publication the Met’s response focused on why no senior officer had done anything wrong despite the long list of failings catalogued: 43 in total, including that, in obtaining search warrants without being fully transparent about the evidence they had, the police had broken the law.

This is about as serious a failure as it is possible to have by public servants whose primary and most important duty is to uphold it. Not break it.

The Met’s apology for the upset caused by the searches seemed to be quite unequal to the failure – the sort of apology you might make if you’d inadvertently interrupted someone having a bath – rather than a realisation of the very great damage done to policing and the administration of justice if those tasked with it cannot be bothered to behave lawfully.

The report by the IOPC (Independent Office for Police Conduct) the following day adopted the same self-justifying tone to explain why there was no basis for disciplining any of the officers involved despite its comprehensive investigation, one so comprehensive that none of the officers involved had been interviewed. What would the IOPC consider an inadequate investigation to be?

One of the critical failings was the police deciding – and publicly announcing – that allegations (of murder and child rape) were true and believable before they had been investigated, as a result of an obligation to believe a victim and, indeed, to call them a victim rather than a complainant. Paragraphs 1.11-1.35 of the report on why these two practices are so seriously prejudicial to proper investigation, the presumption of innocence and the burden of proof (the foundations of our entire criminal justice system) are very well worth reading. In consequence, one of the judge’s most important recommendations was for the police not automatically to believe complainants: “If one policy decision results from this review I trust that the instruction to ‘believe’ a victim’s account will cease.”  The police seem disinclined to follow this advice. Even Vera Baird, the Victims’ Commissioner, despite being a QC, seems not to understand that belief in an allegation is not necessary to investigate it properly.

The belief that victims must be believed without question did not come from nowhere. It arose in part in response to previous police failings. In 1982 Roger Graef’s documentary series about Thames Valley Police caused a stir when the episode entitled “A Complaint of Rape” showed male policemen treating a female rape victim with harsh dismissiveness. This led to important and valuable changes in how the police investigated this most serious and sensitive of crimes. Similar changes have been made with regard to how child victims of sexual abuse are treated, both by the police and by the courts when they give evidence. All of this is welcome: old-fashioned assumptions (that women are asking for it, that children are liars) are no basis on which to investigate crimes.

Some old-fashioned attitudes still persist though: young troubled girls in care are seen as not “nice” and in effect asking to be abused by their attackers, the assumption this time being wrapped up in the mistaken and nonsensical notion that an underage child has given “consent”. At the other end, the police have veered from ignoring crimes alleged against the famous (Savile) to pursuing them with unseemly malice and a misguided focus on making media headlines (Cliff Richard).  (If there is one thing to be regretted from the decision to abandon the second half of the Leveson Inquiry is that there was no examination of the police’s relationship with the press and whether this is compatible with their policing role. It is something which needs much more scrutiny than it is, for obvious reasons, ever likely now to get.) It as if the police veer from one position to another in response to the scandal du jour without any understanding of – or firm attachment to – the long-standing principles underlying the criminal justice system

Now the police have adopted the spuriously sentimental assumption that a victim should be believed without question. To do so is fatally to confuse therapy and care with investigation. The former is laudable but not the role of the police. The latter is.

For investigators to do their job properly they need two skills above all: emotional intelligence – empathy, an ability to understand human behaviour and motivation and build a relationship with both (alleged) criminal and victim. The second is to have what Graham Greene described as the “splinter of ice in the heart”, the judgment and analysis that makes them look coolly and dispassionately at the facts, to base their opinions on what they have found and not what they would like to believe to be true, that makes them remember that they need to find and test the evidence and ensure that it is good enough to convict someone to the standard required.

As the report put it:

“Any process that imposes an artificial state of mind upon an investigator is, necessarily, a flawed process. An investigator, in any reputable system of justice, must be impartial. The imposed ‘obligation to believe’ removes that impartiality.”

If the police allow sentimental beliefs, preconceived opinions and assumptions, pressure from the media or politicians to override the judgments they need to make, they are doing a profound disservice – to the victims (who need their complaints taken seriously and investigated properly, a crucially important difference to simply being believed), to the defendants (who are entitled not to be accused publicly – or at all – on the basis of opinion unsupported by any evidence), to the public’s faith in policing, to the administration of justice itself.

What is so dismaying about the police’s response to the Henriques report is not just the rush to protect their own, the desire to explain why disciplinary action was unjustified, the belief that incompetence and negligence were not sufficient to merit any kind of action.  The approach was that the police had broken no disciplinary rules; they did not intend to cause harm and there was no evidence of criminal behaviour so that was that.  The level of incompetence and negligence on display, the failures in basic investigative tradecraft were simply to be ignored.

No: what’s worse is the assumption that nothing more than this can or should be expected.

The police had passed the low bar expected of them.  43 failings in one inquiry can happen but no-one need take any responsibility.

It is a stunning failure to understand what leadership means.  Leadership means, in essence, taking responsibility for what happens in your watch – even if you are not personally to blame.  Those senior officers who were in position when this lamentable series of failures occurred were the leaders in charge.  If leadership is to mean anything, if setting an example to all those in the police service matters, if an apology is to be meaningful, if learning lessons is to be something other than a cliché to be trotted out, if integrity at the top of policing is to have substance, then those in charge of this inquiry should, in all honour, take responsibility and resign.  Not seek to evade it with self-serving justifications and remorseful cries of “Oh, if only I’d done something different.

The Home Secretary (not noted for either her empathy or integrity or, indeed, her understanding of the criminal justice system – as this article suggests – has apparently asked for a further inquiry to be carried out – though since it is to be carried out by the very body which has come up with the practices roundly criticised by the Henriques report, don’t build your hopes too high. In the meanwhile, the Prime Minister has made great play of his intention to fund 20,000 more police for our streets.  Without wishing to downplay the work of ordinary policemen or, indeed the need for effective policing, with this sort of inadequate leadership and incompetence on show, it is worth asking whether this really is the best use of public money?  Maybe fixing the problems identified by Sir Richard Henriques and implementing his recommendations might come before spaffing money on more police. It can’t, after all, cost that much to remind police leaders of that well-known saying: “The buck stops here.

Back to Basics

July 30 2019

Ever since the financial crisis started there has been a plethora of explanations about why traders and bankers behaved as they did.  Some have been purely descriptive: what happened and when, allowing us to marvel at the folly of it all, at least in hindsight.  At the time these clever financiers were praised by pretty much everyone from Chancellors down. There were very few pointing out at the time that the Emperor had no clothes.

But increasingly there have been attempts to use the insights gleaned from other disciplines to explain why what happened in the way it did. The latest neuroscientific findings were used to describe the biology of boom and bust (The Hour Between Dog and Wolf, for instance). Behavioural economics has had its say, as has nudge theory. Rather than nudging people to behave well, all the payment and reward incentives nudged financiers into doing what suited them financially irrespective of the effect on the customer and no matter what the expressed good intentions of the firm were. Goodness! Whoever could have predicted that, without a theory to explain it.

Psychologists have had their say, of course, though only a cynic might wonder about how much actual knowledge about the realities of life in the financial sector they have. No matter: all could opine merrily on the importance of culture in finance and on all the wonderful insights that these disciplines could bring to those seeking to manage and regulate the financial sector.

And now the anthropologists have got in on the act, as in this article by Gillian Tett. In it she points out how anthropologists have tried to analyse the cultural patterns, the rituals and symbols, even the words people use in finance to understand what was going on under the surface. In truth, the insights brought by anthropologists (at least as described here) are pretty obvious rather than thought-provoking; the article does not need them to be worth reading.

What is interesting, though, is how commentators on finance and perhaps also regulators are, perhaps unconsciously, making the same mistake as many of those traders and bankers. They are over-complicating, coming up with all sorts of theories and hypotheses apparently grounded in science or other social studies, described and interpreted by experts, using technical language to describe common human behaviours. Just as too many traders developed over-complicated products which they only half-understood and managers kidded themselves into believing that they had found a foolproof solution to valuation or risk management or any of the other difficult tasks they had, so there is a risk of developing overly complex explanations for why so many people behaved so stupidly or worse. The risk is that the more complex the explanation, the more people feel that it is all too difficult really to do anything about it or that this is something best left to the culture specialists, psychologists and other “ologists“.

Keep it simple might be the motto. In the end, by whatever means the conclusions are reached, what everyone in finance needs to remember is this:-

  1. Trust is at the heart of finance.
  2. Everyone in a financial institution is, in one way or another, managing risk.  There is no such thing as a risk-free product or institution.  Or, indeed, individual.  Understanding the risk you are running and managing it properly is what every bank, every employee in a bank, every customer of a bank, every shareholder in a bank, every investor in a financial product and every regulator of a bank is doing.  Or ought to be doing.
  3. Understanding properly is hard work.  There is no magic bullet, algorithm, theory, process, spreadsheet, AI or killer piece of management information which will do it for you. Thinking is often required.
  4. There is no way of eliminating risk.  Mitigating and minimising it: yes.  Eliminating it: no.  If anyone says otherwise (and much of the financial crisis was caused as a result of clever people thinking they had done just this and learning, painfully, that they hadn’t) they’re a charlatan or worse.
  5. Human beings, even clever ones (particularly them, it sometimes seems) do not behave rationally around money. Money and emotions are bosom pals. As any decent novelist or lawyer dealing with divorces or wills will tell you.  The “animal spirits” Keynes described do not just apply to market participants but to all of us.
  6. Managing people, understanding them, motivating them, inspiring and leading them, teaching them, setting them a good example, setting them high expectations and making it clear what the boundaries are, what behaviour will not be accepted, what crosses the line, helping them get past their frailties, working effectively with them is hard work, the hardest work anyone ever has to do.  And by far the most valuable – and rewarding.
  7. Finance is there to serve others, not itself.  It is a means to an end and the moment it (and the people in it) start thinking of themselves as indispensable, as set apart from the society they are part of, as entitled to special consideration and immunity from challenge is the moment when hubris sets in.  Nemesis will surely follow.

 

Photo by Lesly Derksen on Unsplash