UK enforcement: Charging Barclays is a good first step to ending corporate impunity
Thursday, June 22, 2017 at 8:22AM
Rahul Rose and Sue Hawley in Barclays Bank, David Cameron, David Green QC, Financial Conduct Authority, Rolls Royce, Serious Fraud Office, Volkswagen

Until the SFO announced its charges against Barclays, not a single UK bank or individual had faced criminal prosecution for their role in the financial crisis of 2008.

The financial crisis and the recession that resulted is the root cause of the austerity measures that are causing such deep damage to the UK’s public bodies, including local councils, the National Health Service, fire departments and schools.  

The Bank of England estimated that the crisis caused lost output in the UK of between £2 and £7 trillion. £50 billion of public money alone was spent on bailing out UK banks.

One would have thought that going after those responsible for causing the crisis and extracting significant penalties would have been a policy priority of the UK government.

The United States has managed to collect billions in penalties from banks for their role in the crisis. Between 2009 and 2015, 49 financial institutions paid fines totalling $190 billion to U.S. prosecutors and regulators. For the LIBOR and FOREX rate-fixing scandals alone the United States imposed fines of over $10 billion.

In contrast, UK financial institutions have got off lightly. British banks have paid just over $2 billion in fines to the Financial Conduct Authority for LIBOR and FOREX related wrongdoing.

The Serious Fraud Office’s (SFO) decision to prosecute Barclays and former executives for alleged financial crisis-era wrongdoing is therefore hugely welcome on many levels. It's a good example of why the SFO is essential for fighting financial crime in the UK and why its future must be urgently secured. The Barclays case is the first criminal prosecution faced by a bank for financial crisis related misconduct.

Significantly, in charging four former senior Barclays’ executives, including the former CEO John Varley, the SFO has also surpassed its far better resourced U.S. counterpart, the Department of Justice. The DOJ has been criticized for failing to prosecute top-level bankers for alleged wrongdoing during the financial crisis. Only one banking executive has gone to jail in the United States for playing a part in the crisis.

It is also hugely welcome that the SFO did not do a cozy deal with Barclays by giving it a Deferred Prosecution Agreement -- its deal with Rolls-Royce earlier this year was widely seen by commentators as letting Rolls off lightly.

But we should remember that the Barclays case is the first UK prosecution against any financial institution for alleged financial crisis-era misconduct. Others accused of wrongdoing have completely escaped criminal prosecution in the UK. This includes HBOS, where serious organisational failings in the corporate impaired assets division were identified by a Bank of England report into why the financial institution failed. Individuals who had worked in this division were convicted in January 2017 of fraudulent trading, corruption and money laundering, but no action has been taken against the company, which is now part of Lloyds, despite a corporate culture that allowed excessive risk taking.

The lack of prosecutions against businesses extends beyond alleged wrongdoing linked to the financial crisis. UK authorities have failed to prosecute a single company for money laundering.

What’s behind this dearth of prosecutions? Part of the answer lies in the UK’s very weak corporate criminal liability laws. In the UK, to convict a company, prosecutors must generally show that a senior employee, usually one who sits on the board, intended for the wrongdoing to occur. This is very difficult to prove, especially in large and global companies where complex chains of commands between thousands of employees mean senior executives can claim ignorance of pervasive wrongdoing by their own staff.

SFO Director David Green has repeatedly called for reform of the UK’s corporate criminal liability to make it easier to prosecute companies. 

In the United States things are different -- businesses can be prosecuted for the actions of low-level employees. As a result, U.S. authorities have been far more successful than their UK counterparts in imposing criminal fines and convictions on errant companies.

HBSC, a London headquartered bank, entered into a $1.9 billion settlement with U.S. authorities for money laundering offenses but escaped any punishment in the UK. Similarly, Volkswagen has faced billions in fines in the United States and pleaded guilty. But despite 1.2 million UK vehicles being affected by the carmaker’s use of illegal software to mask emission of nitrogen oxides, no UK investigation has been opened.

In recent years, the UK has introduced reforms that make it easier to go after businesses suspected of bribery and facilitating tax evasion. However, one of former Prime Minister David Cameron’s key announcements just before last year’s Brexit vote about introducing similar reforms for how companies can be prosecuted for economic crime in general has been quietly shelved under Theresa May’s administration. Cameron’s promise of a consultation was downgraded to a "call for evidence" which is likely to allow business to claim any such change would impose too many burdens on it.

The results of that call for evidence are pending. It is likely that May’s minority government will park any potential reform. But with Brexit looming, and suggestions in some quarters that London is poised to become a deregulated hub for money laundering, tax evasion and other kinds of financial crime, the UK government now, more than ever, needs to protect the reputation of its economy. Pushing through long-awaited reforms to corporate criminal liability laws should be a key part of this damage limitation effort, not least because such reforms will help deter the kind of misbehaviour that led to chaos of 2008 financial crisis. 

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Sue Hawley who is policy director at Corruption Watch. She was involved in the judicial review of the Serious Fraud Office for dropping allegations of corruption involving BAE Systems in Saudi Arabia. Her investigative work resulted in the conviction of the first British company for overseas corruption in September 2009. She has been working to improve the UK's efforts to tackle corruption for the past 10 years. She can be contacted here.

Rahul Rose is a senior researcher for Corruption Watch, a London-based NGO that undertakes cross-border investigations into grand corruption and pushes for effective enforcement of UK anti-corruption legislation. He can be contacted here.

Article originally appeared on The FCPA Blog (http://www.fcpablog.com/).
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