Efforts to tackle fraud, corruption and money laundering could fall victim to corporate capture, argues Prof Prem Sikka.
Last week the government released the first minutes from the Economic Crime Strategic Board (ECSB) – a new body set up to combat economic crime. They do not bode well for those with hopes that corruption and fraud will be held to account.
Legacy of light-touch regulation
Let’s start from basics: the UK has become a central node in the international network of dirty money relating to tax avoidance/evasion, bribery, corruption, narcotics, human trafficking, organ smuggling and gang warfare. The official estimates are that around £100bn is laundered each year though the UK’s financial system. The process is aided by banks, accountants, lawyers, estate agents, art dealers and other intermediaries.
There are already 25 overlapping regulatory bodies dealing with money laundering. In this regulatory maze, for the period 2012-13 to 2017-18 there were 55 investigations for breaches of the UK’s Money Laundering Regulations and 25 prosecutions were brought.
the appeasement of corporate elites by governments has yielded disastrous outcomes, but continues unabated. The light-touch regulation of banks by regulatory bodies dominated by corporate grandees paved the way for the 2007-08 financial crash.
Malpractices in the financial services sector have continued as evidenced by the rigging of exchange rates, interest rates, abuse of small businesses and audacious frauds. Some banks are suspected of forging customers’ signatures to bankrupt individuals and businesses and repossess their assets. This has fuelled corporate profits and executive bonuses.
The same disastrous regulatory model has been applied to the auditing industry and with very predictable results. Accounting firms continue to deliver dud audits whilst their partners continue to collect megabucks. Big accounting firms also have a history of profiting from tax avoidance/evasion, bribery, corruption and money laundering, but face virtually no investigations or penalties in the UK.
Behind the Board
There are no places on the board for trade unions, civil society organisations or victims of economic crimes who can bring diverse perspectives on the problems and issues.
Instead, the board includes CEOs and chief executives from Barclays, Lloyds and Santander, as well as senior representatives from UK Finance, the National Crime Agency (NCA) and the Solicitors Regulation Authority, Accountants Affinity Group and National Association of Estate Agents.
The first board meeting of ECSB was attended by representatives of Barclays, HSBC, Lloyds Bank, Royal Bank of Scotland (RBS), Santander, Morgan Stanley, Standard Chartered, Nationwide and representatives of estate agents, accountancy and law firms.
Here is a small sample of practices that have been seen among some of the businesses populating the ECSB.
Barclays and RBS were part of a cartel fined €1bn by EU for rigging foreign exchange market. The UK’s Financial Conduct Authority fined Barclays £284m for engaging in “collusive behaviour” with others to fix exchange rates.
RBS’ treatment of small business customers in its Global Restructuring Group (GRG) has long been under scrutiny. In February 2018, the House of Commons Treasury Committee released a previously unpublished regulatory report, with findings they branded ‘disgraceful’:
“The overarching priority at all levels of GRG was not the health and strength of customers, but the generation of income for RBS, through made-up fees, high interest rates, and the acquisition of equity and property”.
In 2016, the European Commission fined HSBC for €485m for rigging the key European benchmark interest rate. In 2012, US fined HSBC $1.9bn for practices that allowed terrorists and narcotics traffickers to move billions around the financial system. By paying the fine, HSBC avoided prosecution which could have resulted in loss of its US banking licence and closure. The US revelations did not result in any investigations in the UK, but then-Chancellor George Osborne privately urged US regulators to go easy of the bank, as it was too big to fail.
Just last year Santander was fined £32m for keeping dead customers’ money meant for beneficiaries. Some 40,428 customers were affected. Santander failed to disclose information relating to the issues with the probate and bereavement process to the UK regulator.
In December, Morgan Stanley was fined $10m for anti-money laundering failures, while this year UK and US regulators jointly levied a fine of $1.1bn on Standard Chartered for sanctions busting and money laundering.
The NCA routinely complains that law firms fail to report incidences of money laundering. Too many accountants are complicit in money laundering, but face little/no sanctions because they are regulated by their own trade associations. The Office for Professional Body Anti-Money Laundering Supervision, one of the money laundering regulators, concluded that:
“The accountancy sector and many smaller professional bodies focus more on representing their members rather than robustly supervising standards. Partly because they don’t believe – or don’t want to believe – that there is any money laundering in their sector. Partly because they believe that their memberships will walk if they come under scrutiny”.
Yet, through its membership of the ECSB, the accountancy industry and banks are able to make rules on money laundering.
The ECSB is destined to fail if inconvenient truths like these continue to be swept under the carpet. Corporate capture is a key problem behind all regulatory failures. Sadly though, the UK government appears committed to perpetuating a failed model of regulation.
Prem Sikka is a Professor of Accounting at University of Sheffield, and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor for Left Foot Forward and tweets here.
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