The British political system breeds corruption

"Whilst any drive against corruption is welcome, a focus on Covid alone will neither shackle predatory corporations nor the political system which nurtures nefarious practices."

Palace of Westminster

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

The Labour Party has announced that if it wins the next general election it will create a Covid Corruption Commissioner to recoup billions lost to fraud. Covid related frauds are extensive. Applicants for furlough support were not required to provide the national insurance number of the workers and that enabled some to secure money for non-existent employees. Loans administered through banks did not require businesses to provide tax reference number. Numerous non-trading and newly formed companies secured government loans.

The New York Times examined 1200 UK government contracts related to the acquisition of personal protective equipment (PPE), ventilators, coronavirus tests and other supplies worth $22bn. Nearly $11bn went to companies run by friends and associates of politicians in the Conservative Party. Fashion designers, pest controllers and jewellers won lucrative contracts, often with no competitive bids. Transparency International placed a ‘red flag’ on £3.7bn worth of PPE contracts handed to entities related to individuals connected with the ruling Conservative Party.

The total losses are hard to estimate, A Public Accounts Committee report refers to “£21 billion lost during the pandemic” and “very unlikely that most of the losses due to fraud and corruption will ever be recovered”. There is some ongoing litigation and others estimate that up to £10.8bn may not be recovered.

Whilst any drive against corruption is welcome, a focus on Covid alone will neither shackle predatory corporations nor the political system which nurtures nefarious practices.

Corruption is commonly understood as the abuse of entrusted power for private gain and it is highly visible. Major UK political parties are funded by private interest organisations. In the words of Conservative Party donor Mohamed Amersi: “You get access, you get invitations, you get privileged relationships, if you are part of the setup.” Easy access to policymakers helps to shape laws, regulation and keeps threatening issues off the political agenda.

In recent years, property developers have filled the coffers of the Conservative Party and the government has relaxed planning laws. Ministers have overridden objections by local council officials to boost developers’ profits. And who can forget the Tony Blair led Labour government banning tobacco advertising but exempting formula one racing from it after receiving £1m donation. On this occasion, after a public furore, the donation was returned.

Too many legislators are available for hire to the highest bidder through consultancy jobs and advance the interests of their paymasters. Scandals have not deterred the lust for private enrichment. A recent sting operation recorded that the former chancellor, Kwasi Kwarteng, and former health secretary, Matt Hancock, would charge £10,000 a day to further the interests of a fake company.

The finance industry has been a serial offender and mis-sold numerous financial products, including mini bonds, pensions, endowment mortgages, precipice bonds, split capital investment trusts, interest-rate swaps and payment protection insurance. It has rigged exchange and interest rates and is involved in money laundering, tax abuse, sanctions busting, bribery, and illicit financial flows. In principle, the police could investigate, but the City of London Police Fraud unit is funded by Lloyds Bank.

The political elites shield the finance industry. There is the classic case of HSBC. In 2012, it was fined $1.9bn by the US regulators after admitting “criminal” conduct” which enabled terrorists and drug-kingpins to launder money. It entered into a deferred prosecution agreement. HSBC was supervised by the Bank of England (BOE) and the Financial Services Authority (FSA) but they took no action. Some years later evidence emerged showing that the then Chancellor George Osborne, the BOE and the FSA were urging the US authorities to go easy on HSBC because it was too big to fail. In parliamentary debates, I have asked Ministers to explain their interventions but received no reply.

There is the unresolved saga of frauds at HBOS and Royal Bank of Scotland (RBS) where too many small businesses were placed into insolvency and asset stripped to boost bank profits and exec bonuses. The Police, the Serious Fraud Office and the Financial Conduct Authority (FCA) refused to prosecute the offenders. Faced with inaction, Anthony Stansfeld, the Thames Valley Police and Crime Commissioner, prosecuted six financiers, including a senior ex-HBOS banker. They collectively received 50 years prison sentence for their role in £245m worth of dud loans. Stansfeld concluded: “I am convinced the cover-up goes right up to Cabinet level. And to the top of the City.”

The state-capital nexus and revolving doors between governments, regulators and finance industry have institutionalised corruption in numerous fields. Around 27 former directors of England’s water regulator (Ofwat) hold senior management positions at water companies. Little regulatory action is taken against companies for boosting profits by dumping sewage in rivers and failures to plug water leaks from crumbling infrastructure.

The Grenfell fire and the death of 72 people showed that the closeness of regulators and the building industry resulted in the use of inferior insulation as that boosted profits. The cognitive capture of regulators marginalises critical voices and has deadly effects.

Powerful corporations are able to negotiate secret sweetheart deals with HMRC, possibly paying a fraction of the taxes that the less powerful might pay. Due to confidentiality of tax matters, the deals remain secret and cannot be scrutinised by parliament. There is no way of knowing whether the deals are lawful or fair.

Little has been done to shackle the tax abuse industry even though since 2010 between £450bn and £1,500bn of tax has not been collected. Numerous court judgements have condemned the deep involvement of big accounting firms in marketing tax abuse schemes and declared them to be unlawful. No major firm has been investigated, fined or prosecuted by any professional body, HMRC, Treasury or any regulator.

Corruption erodes trust in institutions of government and harms economic development. Despite a plethora of laws, the UK has had little success in checking corruption. Politicians may get accolades for creating Corruption Commissioners, but that won’t dismantle supply and demand for corruption, or institutional structures perpetuating it. The UK lacks appropriate regulator architecture. There is no central enforcer of company law. Regulatory bodies are captured by the business interests that they are supposed to be regulating. At the very least, substantial stakeholder representation on regulatory bodies is needed. Transparency can help. For example, public availability of the tax returns of large corporations can empower citizens to scrutinise their affairs and exert pressure on governments end abuses. Ending private interest funding of political parties and second jobs for legislators is a necessary step is creating a robust anti-corruption environment.

Image credit: Diliff – Creative Commons

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