The Economic Crime Strategic Board and the Concept of “Marasmus”

Here in Financial Regulation Matters we have covered the concept of ‘capture’ from a number of different angles, including the audit, banking, and tobacco industries through to the concept of ‘public private partnerships’. Additionally, we have also looked at issues relating to money laundering, and economic crime more generally. It is for those reasons that the recent news that the British Government have put in place a number of plans to tackle the systemic issue of economic crime within the country – with London being consistently rated as one of the world’s leading economic crime ‘hotspots’ – is worth examining. Yet, rather than this being the headline, there is a glaring issue that the media have been quick to focus upon. The Independent’s headline neatly sums up the story: “Government criticised for giving banks key oversight role over fraud and money laundering”. So, in this post we shall examine these developments and analyse the theory of ‘capture’ a little more.

The Economic Crime Strategic Board was established by the British Government in January 2019 and exists to ‘set priorities, direct resources and scrutinise performance against the economic crime threat, which is set out in the Serious and Organised Crime Strategy’. Sajid Javid stated that ‘we need to take action on all fronts to target the corrupt fraudsters’, whilst Philip Hammond declared that ‘the UK is leading the world in the fight against illicit finance, preventing fraudsters from stealing billions from the public each year’. That claim is easily countered by the fact that London is a laundering hotspot on the global scene, and also that the Government itself admits that economic crime costs the British citizenry at least £14.4 billion a year (which will be a remarkably low estimate in reality). To counter this global and multi-billion pound threat, the Government has allotted just £48 million over 2019 and 2020, which it suggests will ‘further ramp up law enforcement capabilities to specifically tackle illicit finance’. Bob Wigley, the Chair of UK Finance – the country’s leading financial lobbyist – stated that the ‘private sector can’t tackle [the issue] alone’ and was therefore grateful of the governmental assistance. Whilst the stated aims of the governmental ministers can be easily recognised as what they are – lip service – the media’s focus is worth considering also.

The media have chosen to focus on the inclusion of HSBC, RBS, Barclays, Morgan Stanley, and UK Finance on the Board, citing Conservative MP Kevin Hollinrake who stated that ‘it is also worrying that the members of the body charged with the responsibility for this… includes the CEOs of the major banks’. The first point to deal with is that the Government were clear on their approach, with the announcement including the line in the first paragraph that ‘The Home Secretary and Chancellor will… jointly chair a new government taskforce which will work with senior figures from the UK financial sector to tackle economic crime’. So, whilst the accusations of ‘corporate capture’ are correct, they are not a secret. Furthermore, whilst interested onlookers have commented that ‘it portrays the banks effectively as victims rather than potential perpetrators of economic crime. Clearly, they are both’, the reality is that there have been very little suggestions of alternative solutions being offered, just criticism. It is surprising that a. people expect the Conservative Government to do anything other than work directly alongside private interest whatever the cost, but also b. that there is a suggestion that anything else can work. It would be interesting to ask these same people what they suggest would be the best way forward in terms of personnel. Yet, there is a concept in the literature that makes another point and which transforms the discussion.

In discussing the genealogical history of the study of ‘capture’, Professor William J. Novak tells us of how the famous proponents of the concept – scholarly giants such as George J. Stigler – have their base in the theories developed by Samuel P. Huntington, a young Harvard Government instructor advising the Interstate Commerce Commission in the 1950s. In relation to railroad intervention within ICC policies, Huntington described a story of agency decline and ‘marasmus’, which Novak tells us is a ‘biological pathology featuring a gradual and continuous wasting away of the body from a morbid cause’. It is important to note this ‘morbid cause’, because the decline is therefore not a naturally occurring instance, as Novak continues ‘Morbid cause was key here, for it was not just time or desuetude or inertia that contributed to this peculiar regulatory disease. Rather, Huntington proffered a more distinct and direct cause, that is, the infectious influence of pervasive railroad interest in almost every aspect of ICC policymaking’. Huntington’s suggestion was that a regulator must be independent, and if that objectivity is no longer there, then there is little point having a regulator. Novak discusses how the field that is interested in regulatory theories and their effects essentially came to a conclusion that little could be done, and it is difficult to move that line of reasoning forward. We know that institutions like this Strategic Board are primed for capture, and we currently exist within an environment where Governments are not even discreet with the fact they are captured. Interestingly though, onlookers have also bemoaned the lack of development in terms of corporate liability, with the antiquated notion that a ‘directing mind’ needs to be evidenced in order to criminally charge a company and/or person being targeted as proof of a lack of will to really challenge economic crime – proponents of this argument suggest that a ‘failure to prevent’, like that seen in bribery and tax evasion cases, should be expanded to more economic crimes. Which leads to another issue – are we focusing on the entirely wrong aspect of the fight against white-collar crime?

It seems that ‘we’ are, and that ‘we’ represents the general consensus. It is not, by a long way, the universal view. In fact, many have already confined regulators like the FCA, the FRC, this new Board, and many other regulators to the classification of ‘captured’. Under Huntington’s thesis, they should technically be wrapped up and discarded, as they clearly no longer serve their original mandates – the FCA’s behaviour regarding RBS and the GRG unit is a clear example of this. However, if we discard regulators, it will be pointless replacing them with more regulators. Perhaps then the key lies in the equalling of penalty for Blue and White-collar crimes. By increasing the capability to charge and prosecute individuals within companies, and then penalising them to the same extent that ‘normal’ criminals are penalised, would serve to alter corporate behaviour. If a CEO of a bank, let us say, was pushing poor practices in the pursuit of short-term gains and executive compensation for example, but the potential penalty was 15, 20, or 25 years in Prison, would the banking CEOs be so bashful in their pursuit of profits? Certainly not. What that does, however, is raise the question of why this currently is not the system. Is it because those in positions of power are usually from privileged backgrounds? Is it because they tend to come from the same backgrounds as the political and legal elite? Is it because, essentially, the political, legal, and business elite are all the same people generally speaking? If the answer is ‘yes’ to any of those questions, then there is no solution on the horizon. Understanding that makes the headlines regarding ‘corporate capture’ as empty as the statements regarding the need to battle economic crime, unfortunately.

Keywords – economic crime, capture, banks, business, UK, @finregmatters