James Thomas speaks with Stephen Platt about his new book, Criminal Capital, and the steps necessary to reform the financial sector

Since the financial crisis, public scrutiny has focused heavily upon examples of excessive risk taking, product misselling, and rate rigging within the financial sector. While acknowledging the significance of such behaviours, Stephen Platt argues that, within the mainstream debate, too little attention has been placed upon the financial sector’s shortcomings around sanctions evasions, money laundering (ML) and the facilitation of crimes (including corruption, drug trafficking, terrorism, human trafficking, proliferation, piracy and tax evasion). Indeed, his forthcoming book — Criminal Capital - How the Finance Industry Facilitates Crime — argues that there is a “commonality of causes lurking beneath all these types of misconduct”. Moreover, he believes that there is a failure on the part of policymakers, the media, and the industry itself to appreciate this commonality, which risks perpetuating the problems of the financial sector. In just over 200 pages he makes a compelling case for “joining the dots”; for understanding that the issues that make the headlines in the mainstream press (i.e. rate rigging etc) have the same root cause as those that are more routinely restricted to the pages of trade journals (i.e. ML, sanctions evasion etc).

A flawed model

Speaking to inCOMPLIANCE ahead of the book’s launch, he explained: “All of these behaviours are symptoms of the same malady.” To understand why this is the case, he says, it helps to envisage the financial system as a set of concentric circles. At the centre are individuals within financial institutions engaged in unethical practices or outright criminality. Around these individuals lie the systems environment and cultural environment of the business. Next are the key risk management functions, followed by the senior management of the organisation. These sit within the regulatory environment,

with governments and policymakers forming the final concentric circle. Visualising the system in this way helps to demonstrate how shortcomings at the centre interact with (and often result from) shortcomings within the surrounding circles.

For example, Mr Platt continues: “Policymakers and governments have got it wrong, particularly when it comes to the issue of financial crime prevention, because they are applying solutions globally that are based on the Financial Action Task Force (FATF) model.” He explains that the FATF model is not fit for purpose, being based broadly on
the experience of western economies, practices and cultures, and therefore relying upon the use of suspicious activity reporting (SAR). “For that model to work the individuals at the centre must be culturally motivated, as well as sufficiently technically competent, to feel secure and safe in making SARs,” he suggests. “But we have to recognise that there are large parts of the world in which that is a very difficult thing 

for bank and finance sector employees to do. So at a macro level this one size fits all model of AML prevention is itself flawed.”

Shifting his focus from a global to a national scale, he also argues that the traditional “placement, layering, integration” model of
ML is “fundamentally flawed” and “fails to highlight the industry’s susceptibility not only to laundering criminal property but also to assisting criminals in acts of predicate criminality in the first place”.
It is, therefore, in dire need of replacement, by what he describes in the book as an “enable, distance, and disguise” model. “For the last 20-odd years I have been intimately involved in investigating ML cases and have seen at first hand how criminal property is laundered,” Mr Platt continues. “Very often what it looks like in practice is impossible to shoehorn into the traditional model of ML. What we have created is a model in the industry’s mind about what the activity looks like, which means that very often when money is being laundered through a financial institution, the financial institution fails to spot it when it is right underneath its nose.”

Put differently, the reliance upon inappropriate models has resulted in weaknesses in the systems used by firms which, taken alongside the cultural weaknesses found within financial institutions (including, for example, “the perennial problem of people in risk management functions being viewed as ‘business prevention officers’”) contribute towards poor decision making by individuals. 

The fear factor

A similar explanation for poor decision making can be found to underlie all of the behaviours outlined above, from risk taking to criminal facilitation. Indeed, Mr Platt cites the example of those individuals who decided to knowingly do business with OFAC specially-designated nationals. Why did they choose to take such risks? The answer, he says, is that they simply calculated that the rewards far outweighed the risks, and this in turn was because “the regulatory environment fails to instil in the industry a sufficiently rigorous fear factor”. The recent fines for FX manipulation highlight this, he continues. “FX manipulation took place beyond 2008, and in some cases beyond the LIBOR probe and into 2013,” he points out. “You’ve got to conclude that, despite all of the heat that was being placed on the finance industry post-financial crisis, there were people within those institutions who made the calculation that the risks were worth taking”.

He concludes that the cultural issues that pervade the sector are therefore closely related to this absence of fear factor, which must therefore be increased. “The point of a regulatory environment is to give people pause to focus their minds on the risks of making wrong decisions,” he says. “That is crucial in an industry that is abundant with opportunities to make a fast buck from making an unethical or illegal decision.” Currently, he continues, penalties are not being targeted

at decision makers, but are being imposed upon the institutions themselves. Instead, what is required is a system which penalises

decision makers (whether at board level or within key risk management functions) and those individuals within an institution that are engaged in the actual wrongdoing.

The Prudential Regulation Authority’s (PRA) recent proposals for a senior management regime simply will not plug this gap, he suggests. “What the PRA is proposing is a regime which imposes upon the industry a lower standard of criminality than applies in any other walk of life: the concept of ‘reckless misconduct’,” he says. “It’s hugely vulnerable to judicial intervention and I don’t think in practice it’s going to work. Furthermore, I don’t actually think it’s necessary because the issue is not that there is an absence of legal instruments that can be used. Instead, what needs to be developed is the stomach to use those instruments.”

Professional standards

As well as targeting sanctions at individuals, Mr Platt also believes that
the solution to the financial sector’s problems lies in achieving greater professionalisation across the industry as a whole, not just for risk managers but, most notably, for board members.

“It is high time that we recognised that banking in particular is a professional discipline in and of its own right,” he says. “If you look at other sectors people in responsible positions are required to have a professional qualification that is absolutely relevant to the job that they do, whether they are nurses, doctors, lawyers, accountants, or pilots. But yet, despite the systemic importance of banks highlighted by the 2008 crisis, there is no requirement for relevant professional qualifications in order for people to operate in key functions within banks.”

Again, within the recent FX case he bemoans the fact that the majority of attention has been centred on the conduct of the traders involved, whereas “there has been a complete absence of attention on the role that was played by the directors of the financial institutions in which they were operating, who were responsible for the environments in which those traders were able to do what they did”. Therefore, addressing the governance deficiencies of financial institutions should be a priority for those concerned with achieving meaningful financial sector reform. “We must begin to recognise that banks are not being run by professionally-qualified banking individuals,” he says. “We need to make an effort to professionalise the board room so that the people running these institutions are not only versed in but are qualified

in not only the pursuit of commercial opportunity but in the management of risks in various forms. These people need to be able to understand the intricacies and vulnerabilities of the products and services that they offer and the markets in which they operate. Unfortunately, nothing that I have seen in all the proposals and recommendations since 2008 even hints at a move towards professionalising the boardroom, and I think that’s a massive missed opportunity.” 

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