Another Fine Mess You’ve Gotten Us Into

WHAT’S ANOTHER €94m fine between friends?  The latest penalties on several banks for fiddling interest rates by running a cartel, is hardly the stuff of headlines. J.P. Morgan, no paragon of ethical performance in recent years, must pay €61m for crooked behaviour involving Libor, from 2008-9.

Yet can you envisage the top brass there breaking into a sweat, biting their lips and wringing their hands over this criminal behaviour?

Of course not. Then there’s RBS, where thepenalty for doing much the same thing will be mitigated since they did a kiss and tell on their rivals. Proves whistleblowing really does have a future.

Between them, six banks were hit with a record €1.7 billion last December for various malpractices involving interest rates. But again, don’t expect tears of contrition–more likely sighs of relief that retribution is mainly confined to punishing “the organisation” rather than any set of known individuals.

The name of the present game seems to be “if we can get away with financial murder we’ll do so; anyway, if it comes to the crunch and we get caught the bank/company will pay.”

In particular, the banking fraternity’s systematic value destruction of other people’s resources would surely make a Mafia don envious. Fining institutions is fast becoming so routine that, like tabloids factoring in potential libel costs, it’s now almost “the cost of doing business.”

Attempts to make people accountable for reprehensible commercial behaviour remain sporadic and certainly unclear in many situations.

This is why regulators prefer going for a corporate fine rather than gunning for individuals. But the result is far too many senior people, particularly in financial organisations, feel virtually immune to the consequences of allowing illegal and unethical behaviour to occur on their watch.

The introduction of Deferred Prosecution Agreements from February 2014 is intended to make it easier to put a prosecution on hold for a defined period so long as the organisation meets some specific conditions. The downside though is the organisation does not need to admit its guilt and all investigations can be conveniently held in private. How convenient.

When it comes to behaviour that goes beyond the formal regulatory framework, you can mainly forget any real change. “If it’s not illegal, then so far as we’re concerned it’s ethical” is how many executives justify what, under closer scrutiny are often unprincipled actions.

If every day behaviours are to change, codes and systems won’t do it. As a PWC  briefing put it earlier this year

“all the relevant elements that encourage and/or motivate people to act in certain ways must be aligned and co-ordinated–including incentives, training, communications, disciplinary processes and performance evaluation.”

– Ethical business conduct: The holy grail, March 2014

Meanwhile rationalisation of unethical behaviour continues and is now almost an art form. There are scores of ways to make unethical practices look “normal” All of them can seem on the face of it entirely sensible–from “Everybody does it” to “they had it coming,” to “No harm no foul.”

For a comprehensive and amusing run down on dozens of these self justifications take a look at: Unethical Rationalizations and Misconceptions, at Ethics Alarms.

The Great Recession since 2008 was largely, if not entirely, a result of intentional fraud. The lack of prosecutions of those responsible must be judged one of the worst failures of the criminal justice system in many years.

We still talk about “Fred the Shred” because he epitomised how so many in his world got away, if not with murder, certainly criminal negligence.

Tesco too may yet face serious fines for its now revealed misreporting of profits in recent years. At least a series of executives have been removed from office, while the whole saga is fully investigated. It remains to be seen whether any actual fraud emerges that might justify an actual jail sentence.

Regulatory authorities of nearly all kinds seem reluctant to go after individuals who may have done wrong. The excuse is usually that it’s hard to prove culpability involving criminal behaviour.

But is it?  For example in the US at least, “wilful blindness” is well-established in criminal law. Courts can use this doctrine to prevent defendants escaping the reach of relevant statutes by “deliberately shielding themselves from clear evidence of critical facts.”

Had this applied in the UK during the hearings on the News of the World and its parent organisation for example, Rupert Murdoch might not have escaped so lightly with merely being labelled by a parliamentary committee as “not a fit person’ to run international company.”

Proving criminal intent is a tough option for regulators, as opposed to merely pointing to negligence. In many instances, even showing an actual law has been broken can be nearly impossible. Certainly in recent financial crisis situations the focus has been on achieving stability, rather than looking for those in charge and shoving them into court.

However, the bottom line is a constant regime of fines is increasingly coming into disrepute. It is not taken seriously enough by those most responsible for allowing or encouraging illegal or unethical behaviour.

This is best encapsulated by Credit Suisse which became the largest bank in decades to plead guilty to a U.S. criminal charge. It will pay more than $2.5 billion in penalties for helping Americans evade taxes.

Yet by its own admission, the bank claims to have seen “no material impact in the past few weeks” on its business, and that clients faced no legal obstacles from doing business with it despite the guilty plea.”

Just as once “too big to fail” seemed all too true, we now have “too small a fine to make a real difference” as an ongoing indictment of regulatory practice.