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

 

Ask Not For Whom The Bell Tolls

January 21 2019

The best single essay on financial misbehaviour was written not by a journalist, academic or former trader, but by a novelist and 25 years ago: The Deficit Millionaires by Julian Barnes, that most pointillist and French of English writers.  It is about Lloyds of London, the huge losses it suffered in the early 1990’s and how trusting Names slowly realised that their faith in a long-standing and well-established institution was utterly misplaced.  Lloyds had been around for ever.  It was part of the City’s furniture.  And it was insurance, after all.  How boring is that. How could anything possibly go wrong?

Well, with exquisite care and sympathy and the precision of a surgeon’s scalpel, Barnes shows us how.  And the story is a surprisingly familiar one.

  • A novel but complicated instrument designed to reduce risk but instead increasing it – the London Market Excess, or the spiral of reinsurance.  “Making a turn” – in the spiral – “was the easiest way to make money” one underwriter said.”
  • Greed – “If you are making a good living, if you have self-regulation, if you are outside exchange control, it’s human nature to get greedier and greedier and greedier”.
  • The market’s rapid expansion in a short period of time.  There was a near-ten-fold increase in the number of Names in 14 years, most of them trusting amateurs and all looking for insurance to underwrite.
  • A lack of due diligence, a suspension of critical faculties, a lack of scepticism coupled with an all too human willingness to believe in the promises of a no risk investment, all wrapped up in a flattering appeal to vanity.
  • A  deeply cynical – and possibly fraudulent – approach by the professionals to those who joined (“If God had not meant them to be sheared, he would not have made them sheep.”) 
  • Relaxation of the rules and lax monitoring of those that existed.
  • The undisclosed conflicts of interest – recruiters were paid a fee for each Name who joined.
  • A lack of transparency – it was Lloyds insiders rather than external members who got onto the best managed, low risk and least spivvy syndicates, justified by the then Chief Executive thus – “In any activity, the professionals will know more than the others.”
  • The breakdown of trust – what Barnes describes as the “tickle of fraud“, the realisation that the belief in “an honourable society, operating on trust, on shared values” was a chimera.  Or as one Name put it more bluntly, “You know, trust, honour, and then to find in such an august body a bunch of craven crooks”.
  • The realisation, far too late, that private warnings were given about some of the risks and unacceptable/criminal behaviour but these were ignored or not shared with those who ought to have been told.
  • The turning of blind eyes to unacceptable/negligent and/or criminal behaviour by a remarkable cast of shameless rogues during the 1980’s, even when the latter were the subject of legal action.
  • The failed institution’s repeated insistence that any problems were only the result of that well-worn old favourite: one or two rotten apples, despite one of those rotten apples being a Chairman of Lloyds.
  • The determined focus by new management only on its new procedures and processes and business plans for the future in the hope that a veil would be cast over the past, without any unseemly digging into it.
  • The eventual realisation by the institution that, as its deputy Chairman, put it, for the previous twenty years it had lacked “total integrity” and “strong government“.

Even the modern new building housing the salvaged and totemic Lutine Bell and built by a famous “name” architect is part of the story.

Barnes eloquently shows how an institution believed to be “the highest name of honesty“, seen as part of a certain sort of honourable Englishness, around for three hundred and five years, a stalwart of the City, selling its services around the world, as venerable as the Bank of England and thought to be as safe, came to be seen, harshly but accurately, as “a cesspit of dishonesty“.

If only this had been published more widely than in a US publication and, later, a book of essays.  If only we had paid more attention.  If only we had learnt the lessons that were there to be learnt.

Everything that went wrong in the run up to the near collapse of the Lloyds insurance market happened again two decades later and led to the financial crash 10 years ago, even with the benefit of external regulation and control.  Indeed, pretty much the same things happened in the lead in to most financial scandals going back hundreds of years.

And, human nature being what it is, it’s a pretty safe bet that a version of all or some of these will happen the next time, may indeed be happening now.  The same behaviours will once again come under the spotlight when the the next scandal becomes known, with its inevitable backing chorus.  

Why didn’t anyone see?  

Why did no-one ask the obvious questions?  

Why did no-one listen to the warnings?  

Why, oh why didn’t anyone act?

As Parliament’s Intelligence and Security Committee put it in a different context“it has been striking how some the issues which arose in [2005 and 2013] have also been seen as having been a factor in 2017.  We have previously made recommendations in these areas, yet they do not appear to have been acted on.”

Scepticism.  Curiosity.  Asking tough questions.  Learning lessons from previous events.  Their absence is a regular feature of many incidents of misconduct, many crises, both large and small.

But ultimately, in finance, as in other sectors, it is those old-fashioned concepts – trustworthiness, integrity, honourable dealing – which remain as essential in 2019, and years to come, as they have always been.

 

Photo by Boris Stefanik on Unsplash

At last……

November 14 2018

2,185 days after he was convicted of two counts of fraud by abuse of position at Southwark Crown Court on 20th November 2012 after a 10-week trial, and despite a shamelessly self-pitying and self-justifying campaign to avoid the consequences of his actions, Adoboli has finally been deported to his home country, Ghana.

The wheels of British justice grind exceedingly slow but they do – eventually – get there.

Let’s put those 2,185 days into a bit of perspective.

  • Amount of money lost by his fraudulent trading: US$2,500,000,000.  (If the sums spent by UBS on remediation and dealing with the consequences of this loss were added in, the totals would be truly eye-watering.)
  • Days spent on remand before his trial: 267
  • Days spent by my team and others working on the investigation: 438
  • Sentence: 7 years or 2,556 days
  • Time actually spent in prison following his sentence: 946

As the City of London Police said following his conviction: “This was the UK’s biggest fraud, committed by one of the most sophisticated fraudsters the City of London Police has ever come across.”  The trial judge, Mr Justice Keith, admirably summed up his character when he described him as a gambler, arrogant and in denial and said that he was: “profoundly unselfconscious” of his own failings.

But despite his masterly conduct of the trial, Mr Justice Keith did not explain in his sentencing remarks why what Adoboli did was so wrong, why fraud – of any type – is so damaging and this lacuna is perhaps symptomatic of our failure to take fraud as seriously as we should, as some other countries do.  After all, if the UK’s biggest fraud does not result in the maximum sentence, what will?

Fraud is too often seen as a victimless or somewhat technical crime or, perhaps more accurately, the victims, especially institutions, are seen as unsympathetic and partly responsible for their plight.  After all, who cares if an arrogant bank loses some money.  They are not like some naive widow conned out of her life savings.  Who gets hurt, really?

But the damage that fraud does is not the loss of money, bad as that can be.  Nor is it even the damage to reputation – and that can be very bad indeed and much more long-lasting than most think.

Fraud is damaging because it is so corrosive of the trust that is the essence of banking, that is – or should be – at the heart of any working environment, at the heart of any good relationship with colleagues, bosses, clients, the public, at the heart of any well-functioning community.  Fraud breaks those bonds of trust.  When someone is trusted and they let you down by lying, by cheating, by taking advantage, by behaving like Adoboli did, like many other fraudsters have done, real people are hurt.  Worse – the very idea of having confidence – in the institution, in your colleagues, in banking as a dependable underpinning of our society – is damaged and takes time to rebuild.  A fraudster does not just destroy their own reputation.  Their actions chip away at the reputation of everyone else in their sector.  And they make it just that bit harder for those people – however good, however hard-working, however trustworthy – to be trusted by others, by the public.

That is the real harm that fraud does.  We would do well to take it more seriously than we do.

 

Photo by rawpixel on Unsplash