The changing face of financial crime

Published: 01/07/2013     Last Modified: 01/07/2013 / Author: Martin Wheatley
Speech by Martin Wheatley, Chief Executive, the FCA, at the FCA Financial Crime Conference, London. This is the text of the speech as drafted, which may differ from the delivered version.

Thank you Ron. It’s a pleasure to welcome everyone to today’s FCA conference.

Those of us who’ve been in or around financial services for long enough, will know the business world is very different now than it was ten or 20 years ago.

Most of us carry more advanced technology in the BlackBerrys in our pockets than was used to run the entire London Stock Exchange in the 1980s – and the environments we work in are unrecognisable from those of 20 years ago.

When I started in financial services, owning an apple meant something far less impressive than it does today - and our desktop computers were backed up every evening using rolls of magnetic tape.

Nowadays, there are hedge fund building processors that can crunch the data equivalent of 30m King James Bibles every day. High frequency traders are running fibre optic cables through mountain ranges to win millisecond advantages. And the fundamental nature of money itself is changing – with virtual currencies challenging the way we all think about finance.

One of the most obvious consequences of these changes, and others like them, is that the financial world is now far smaller. With each step forward, each advance, the global economy becomes more interconnected, risk more networked. The economic Butterfly Effect, if you like, is amplified. 

For those of us charged with tackling financial crime, this is an enormously serious issue.

The fundamental nature of financial crime may not have changed over the years.  The characters who engage today in money laundering; boiler room scams; insider trading; and corruption are essentially modern day Victor Lustigs. No different from the con-artists, patent mongers and fraudsters of economic history.

But the impact of their work is now far more quickly mutualised than ever before.  Money laundering and corruption on one side of the planet can fuel crime on the other in a finger snap. Pension pots can fall and mortgages rise in seconds on the manipulation of benchmarks like LIBOR. Increasingly high-tech Ponzi schemes now cross borders and time zones, collecting millions of victims along the way.

This is the unvarnished nature of economic crime.

It is not just an existential GDP problem. A £40bn cost to the Exchequer. A $2.1tn cost to the global economy. It is a part of our daily experience and will remain so as we see new technologies bring the world even closer together. It will continue to evolve in real time.

Gathering clouds

Already we can see different types of crime emerging. New forms of criminal networks operating across Europe. Gangs coalescing across multiple criminal sectors, in multiple jurisdictions, with 60 or more nationalities among their memberships.  

These new breed of criminal enterprises are, in the words of Europol, essentially running themselves as ‘multi-national companies’. Regularly launching online attacks against financial services and committing VAT fraud in the region of some 100bn euros a year.

Quite reasonably I think, the agency blames this uptick on the effects of the global economic crisis. Criminals profiting from increased demand for cheap goods - and cashing in on attempts by EU governments to increase tax receipts.

I’ve no doubt that analysis is correct. It is certainly difficult to argue against the fact that new types of crime are emerging. But we should be careful not to pigeon hole financial crime as a product of economic crisis alone.

One of the lessons of financial history is that as economies recover and grow, the threat of financial crime does not diminish. It doesn’t drift away.

In actual fact, we know periods of economic growth are as likely to cultivate financial crime as periods of contraction. Analysis by the FSA and Financial Action Task Force has shown no significant rise, or fall, in economic crime after the 2008 financial crisis.

The truth is that as money flows more freely there is the same impatience for slow gain, and susceptibility to certain types of economic crime, as there is when money is scarce.

That’s the reason why we see the emergence of credible, messianic figures like Lustig, John Blunt, George Hudson, Gregor MacGregor, Bernie Madoff and Robert Maxwell in the good times as well as the bad. Financial growth can reinforce financial crime in the same way as contraction.

So as we move forward, we need to remain alert. We need to be aware of how financial crime waxes and wanes through economic cycles, and remain sensitive to emergent risks.

Enforcement

To achieve this goal, the FCA has a new style of regulation – with new powers and a new philosophy to be forward looking and forward thinking. 

That means we are now far more actively looking at trends, innovations and data to support markets to work well and to protect consumers.

But the new FCA is not simply a consumer protection authority. It is not simply a markets orientated authority. It is just as much an enforcement authority, with a clear mandate to pursue prosecutions, issue fines, ban individuals from financial services and prevent future financial crime.

Last year alone, we handed out a record £312m in fines, more than triple the previous high number of £89m.

Between 2010 and 2012, 67 applications for approval to senior bank executives were withdrawn prior to results being announced. Compared to just 21 in preceding years.

We’ve secured landmark legal victories against illegal land banking, and sharp rises in the number of insider trader cases being prosecuted: 23 convictions since 2009, two this year and a further seven cases pending.

And we’ve issued several fines for weaknesses in anti-money laundering controls at major banks – as well as individual punishments: including a £17,500 fine for a former money laundering reporting officer.

The story here is one of a far more confident, intelligent and sophisticated enforcement practice. The mechanisms and moral benchmarks we work towards are almost completely divorced from those of ten or 15 years ago.

So, where once teams worked in baronies, we now place huge emphasis on the importance of the threads that run across and between divisions. Staff in our supervision and markets departments working on a daily basis with enforcement colleagues at every level of the organisation.

The FCA is also now far more willing to make judgement-based decisions. Ethical decisions. To examine questions of moral hazard as much as questions of mechanical impropriety. That is important I think.

You can’t always react or respond to gross derelictions of moral duty with a tick list of technical submissions. The Old Testament doesn’t record Moses descending from Mount Sinai with an FSA rulebook.

There has to be some sense of ethics and responsibility: of culpability when things go wrong and pride when things go right.

And this is why the FCA now attaches such significance to personal conduct in financial services. Not only pursuing far more cases against executives – fines, criminal prosecutions and bans – but also crystalising the idea of personal accountability.

For example, we now see much greater regulatory use of attestations. Legal affirmations that focus the minds of senior executives by requiring them to sign on the dotted line to say: ‘Yes, I’m happy my firm is dealing with regulatory concerns. I’m happy to stake my professional reputation and authority on the quality of our compliance processes.’

I think this is a significant step forward. A much needed reform that is already taking shape in areas like LIBOR, where the Serious Fraud Office is readying its case files against individuals as we speak.

What the public do not see when these stories are splashed across the papers, what they do not always fully understand, is the vast amount of work that our enforcement teams dedicate towards securing such complex convictions, fines and punishments. 

It can take months, years even, of painstaking intelligence gathering, analysis, evaluation and synthesis of evidence to build robust cases against criminals and organisations.

In the most complex cases, especially in areas like insider trading, this effect can be particularly pronounced.

Blue Index example

It involved years of hard work and cooperation between us, the FBI and the American Department of Justice to close last year’s action against Blue Index: an insider dealing case involving sophisticated spread bets made through a network of intermediaries in London.

Four senior traders at the firm, and one of their wives, made profits well north of £12m from trading on inside information in several US stocks between 2006 and 2008.

James Sanders, his partner Miranda and their business partner James Swallow, were handed prison sentences and confiscation orders last year

Almost inevitably, there was significant press interest in the outcome. Not least because the proceeds of the dealings were spent on multi-pound townhouses in areas like Kensington and Fulham, as well as on Ferraris and expensive jewellery. 

But what was arguably more interesting from my perspective, more revealing, was the sheer scale of the investigation itself. The amount of forensic analysis and work performed by the FCA and its partner agencies in the States: Eight premises searched; 800,000 recorded phone calls seized; 26 million emails reviewed and read. A vast operation that gives an insight into the work conducted by Tracey and her teams and the lengths we go to in order to secure prosecutions.

Over the next year this new brand of enforcement work will continue. In our line of fire: sanctions, investment fraud, bribery, and corruption – as well as money laundering through the financial system, which is currently estimated to involve some $1.6tn a year, or 2.7pc of global GDP.

And on this final point, I do think we need to be very clear that it’s simply not acceptable for firms to turn a blind eye to where money comes from. Its journey from A to B.

The Home Office estimates domestic organised criminal gangs generate around £20 to £30bn a year from the sale of narcotics, people smuggling, trafficking and other illicit activities.

Their colleagues in the Treasury believe that around £10bn of that money – equivalent to nearly £600 for each working household in the UK – is filtered, cleaned and effectively re-bottled through the regulated sector: banks, accountants and lawyers.

I understand it’s not easy to trace where this money comes from. There are around 26,000 regulated financial services firms in the UK – and between them they handle an impossibly large sum of money. Asset managers alone manage total funds valued at well north of the combined GDP of the UK and Germany. Breaking down the origin of every penny of that money is not straightforward.

But our financial services should be under no illusions. You do not have to be standing at the scene of a crime, knife in hand like some modern day Macbeth, to be implicated in its planning and execution.

If an institution does not have the necessary systems and controls to identify money laundering risks – or to pick up on areas like terrorist financing – they will have the most serious questions to answer.

The Financial Action Task Force, the Wolfsberg Group and the Joint Money Laundering Steering Group have all drawn attention to this issue. There are no excuses for inaction and I expect progress to be made today.

What I do not want to see is a long line of corporate lawyers marching on the FCA, pitchforks in hand, to lobby against the costs or inconveniences of belt and braces good governance. This is not a matter of debate.

Prevention

The regulatory counterweight to enforcement, the other side to this coin, is prevention and deterrence. So, not just collaring the individuals and firms that have committed a financial crime. But preventing crimes from happening in the first place.

We can’t wipe out financial misconduct – any more than we can wipe out car theft, shop lifting or burglary. But what we can do, and what a good regulator should do, is become as effective as possible at using raw intelligence and data to reduce its impact.

That is not straightforward. The modern world is highly efficient at creating information. Less good at enriching it. The chief executive of Google, Eric Schmidt, famously estimated we create as much information every two days on the internet, as was produced in the entire history of mankind up until 2003.

To cut through this data fog, the FCA has to operate at the most sophisticated level of analysis and intelligence gathering. You can’t tackle modern financial crime with whistles and truncheons. And that’s why we have the functionality – the ability – to run covert and highly sophisticated operations against individuals and firms.

These high-tech, modern tactics are a vitally important function of the FCA prevention work and it’s to Tracey’s credit that the review work we do is receiving international attention and praise.

One of the most important areas we’re already investigating in this way, with the Pensions Regulator, the Government and law enforcers, is pension liberation.

The uplift in cases of workers being conned out of pension pots by ‘financial advisers’ – and I use that term in the loosest sense – is worrying. It is a scam that operates on the very fringes of legality and morality: often beyond them.

Last week The Times reported on a 48-year-old man who was persuaded to unlock his pension pot after running up debts paying for his mother’s funeral. He received just £35,000 of his £70,000 pension savings. Others are losing 60, 70, or even 80pc of their pension pots and it is a trend that is growing by the day.

Friends Life has already blocked some 482 suspicious pension transfer requests in the first five months of 2013. Compared to 56 for the entirety of 2012. Already, half way through the year, a 760pc increase. Phoenix insurance group has seen the number of cases rise from 150 in a four-week period three months ago, to more than 520 recently.

As part of our prevention work, the FCA has begun investigating how we can give added protection to pension holders – on top of the law enforcement work already being done by the police. So, for example, how we clamp down on the tactics of advisers and firms who give pension liberation the veneer of respectability.

This is important work. A responsibility for the FCA. But it’s also important for firms to be alive to the dangers of pension liberation and quick to pick up on them.

Conclusion

Finally, let me just mention the significance of the collaboration between agencies and across borders.

The FCA relies on the contribution of a huge catalogue of institutions: from the ‘close to home’: like the City of London police. To the far flung: agencies and officials in territories like Nigeria, the US, Kazakhstan, the Caribbean and Canada.

So, I want to end with a thank you to everyone here, both from home and abroad, who contribute to this work.

As the world shrinks and the effects of economic crime are amplified, the importance of global cooperation becomes more important by the day.

And that’s why we see increasing international pressure on areas like banking transparency from the Financial Action Task Force, the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF). As well as the G8’s well-publicised work to reduce tax evasion and corruption.

As this clamour for action grows, I want us to remember that financial crime will remain a very live risk as the world economy rebuilds. We need to be aware of this risk and look for opportunities for improvement wherever we can.

This is not a problem that is going to go away but it most certainly can be checked, controlled and contained.

Back to top >