The UK's Response to Global Financial Crime
I want us all to focus on the threat to our economies presented by financial crime, in all its myriad forms. At this conference, we are particularly considering the current state of international co-operation between law enforcement agencies. Without this inter-governmental facility our ability to combat fraud and other financial crime would simply dry up. We must ensure that law enforcement can operate in the same global arenas as financial crime! Financial institutions, products and systems have for a long time been operating internationally.
World citizens can invest and do business whilst virtually ignoring national borders. Yet they still expect that national regulatory standards and criminal laws will somehow apply to their dealings and that their home states will enforce these. How to balance these expectations with the practical ability of our national legal systems is the challenge before us.
For example, in international finance, the City of London exports £19bn of financial services more than it imports, supporting an industry that generates around 8.5% of the UK economy and one million jobs. In business, of the 800 multinational headquarters relocations since 2002, 20% were to the UK.
A recent ACPO study1 has estimated that reported fraud alone costs the economy and society at least £13.9bn a year. It predominantly attacks the financial services industry (which contributes over 8% of UK gross national product) and the government itself, in revenue and benefit fraud.
As the pace of globalisation increases, countries such as the UK are being joined by new emerging economies as hubs of new ideas, international talent and trade and innovative technology. This openness, in fact, is the engine of our economic success.
But these great opportunities of globalisation can be used to do harm as well as good. In recent decades, sophisticated criminal and terrorist networks have emerged to become every bit as entrepreneurial and international as modern businesses. These now pose a significant challenge to UK interests at home and abroad, both threatening life, and our way of life. And the UK is not alone, of course.
Economic crime and fraud are virtually synonymous. These are the silent crimes, so often described (falsely) as ‘victimless’. They are ubiquitous, latching on to money flows and financial transactions wherever they occur. Corruption is as pernicious, and money laundering underpins all forms of economic crime. We all know that these crimes have an international dimension – that they may be conceived in one jurisdiction, perpetrated on victims in others and the proceeds salted away in yet others. This mobility impacts on our ability to investigate and prosecute – even with recent improvements in mutual legal assistance, the obtaining and deployment of foreign evidence causes problems for our police and courts.
We know that for many years, fraudulent schemes have themselves been used to launder money from other crimes and to fund still more; including terrorism.
Criminals and terrorists can move funds internationally more easily – capitalising on failures to cooperate across borders. For example, it is estimated that £3bn of criminal profits are moved out of the UK annually in an attempt to put it beyond the reach of authorities.
The UK – and British interests overseas – also face an enduring terrorist menace that is historically unique in terms of its scale and international dimensions. The financing of this activity is equally international. Funds are very often being raised in one country, used for training in a second, for procurement in a third and for terrorist acts in a fourth – and the outcomes broadcast in propaganda across the world.
And while the financial sector in the UK relies on its international reputation for integrity and fair-dealing, it has itself become a target for organised crime – including fraud. Everyday – every second in fact – the UK’s financial services industry drives global growth by linking the owners of capital, to the businesses that need that capital to invest and provide jobs and growth. But it is precisely this success that the perpetrators of fraud seek to subvert through calculated deception – often directed against some of our most vulnerable citizens.
Ordinary citizens foot the bill for these threats. The economy suffers and tax revenues are lost. The taxpayer pays again for increased police and from the costs of crime against business that are passed on to consumers. The human cost of raided pensions or of life-savings embezzled can be beyond calculation.
Some years ago a gigantic pyramid investment scheme literally brought the then government of Albania to its knees. Thousands of people lost their life savings and many more had borrowed to fund their participation in what turned out to be no more than a criminal ‘ponzi’ scam.
Every year fraudsters target carefully chosen groups and follow up on press reports – US Christian Communities, charities like the Salvation Army, ‘women empowering women’, redundancy cheques, even industrial injury compensation payments. The fall out from these individual disasters has an inevitable ripple effect.
Investment and share ‘boiler-room’ scams have been proliferating worldwide for several decades. Southern African states and China are the latest targets. As Internet usage spreads, so do these fraudulent schemes. The virtual world is as dangerous as the natural one.
In late 2005, the Attorney General and the Chief Secretary commissioned a Review of Fraud in England and Wales. One of the questions posed in the Review’s terms of reference was “what is the scale of the problem [of fraud]?” The Review team was unable to answer this question fully. The fact is, we do not know with any accuracy what are the total costs of global financial crime. These costs may be direct – in terms of losses to individuals or corporations, or they may be indirect in terms of the damage done to the wider economy and – crucially – of damage done to investor confidence in our financial institutions, products and systems.
For evidence that investors are nervous and uncertain in the face of global financial threats we need look no further than the recent ‘run’ on Northern Rock. That nervousness was provoked not by anything that happened in the UK, but far away in the US.
The Association of Chief Police Officers (ACPO) study that I mentioned earlier in my speech tells us what we suspected already – that fraud costs the national revenue, the economy and every individual in the country a minimum of £13.9bn every year. Saving the estimated public sector losses alone would pay for an Olympic Games every year!
The centre for Crime and Justice Studies at King’s College, London University, has also recently published a rather shorter report exploring individual victims’ experiences of “Corporate fraud and its devastating impacts.”2 Of course these are just domestic studies. Worldwide, the problems are magnified.
But from these and other studies we can be sure that as a result of financial crimes, people have less money to spend in the legitimate economy. Individual victims may need to claim state benefits or housing. Savings that could have been invested profitably in the national tax paying economy are lost. Acute psychological distress can be caused, requiring medical attention and resources.
When a company or banking institution fails due to fraud or financial malpractice it is not just the target company that suffers. Small businesses and individual suppliers will also lose their contracts and knock on insolvencies are inevitable. The state picks up the tab for those thrown out of work – whole communities bear the brunt for years afterwards. Think BCCI, think Enron, think Maxwell pensioners. When a large financial institution, like BCCI, is both corrupt and itself a vehicle for money laundering, the fall out can include widespread loss of trust in the sector itself. Every major corporate scandal affects the markets concerned. The effects of corruption and money laundering are no less iniquitous.
Our efforts to combat financial threats like fraud, money laundering and terrorist finance exemplify our determination to reduce the opportunities provided by the financial system to promote commerce and investment. They must be protected from criminal exploitation.
We have had some recent successes – including:
But to continue this success, we need to work together. We know for example, that criminals capitalize on the lack of routine data sharing within Government itself. As part of an effort to challenge this, the UK has launched several data sharing exercises – such as the National Fraud Initiative, which identified fraud and overpayments of state benefits of over £111m in 2005. Where there are bottlenecks that prevent the sharing of information necessary to reduce crime and the harms caused by crime, then these should be removed, both domestically and internationally.
The benefits are obvious. Data sharing to prevent fraud amongst the private sector alone has been estimated3 as likely to save the member firms of CIFAS £1bn by the end of 2007.
Collaboration between government and industry is also critical. This is not just because government and industry alike are the victims of financial crime – often committed by the same perpetrators. It is that the intelligence necessary to create a more hostile environment for criminals is spread across government and the private sector.
For example, financial information – generated and held by industry – is a key part of the evidential case necessary to hold criminals and terrorists to account, allowing law enforcement to:
For these reasons, in fact, financial investigation now plays a major part in every UK counter-terrorist investigation.
We have also put in place some new legal structures to address financial crime and support our law enforcement agencies:
The process is, of course, ongoing. As we find more weaknesses and loopholes that can be exploited by financial criminals, we need to act. The current Serious Crimes Bill, passing through Parliament now, is an example.
I make no apologies for that fact that some of this legislation is pretty robust – indeed has been described by some as ‘draconian’. We need to prevent and deter financial crime before it happens; as well as reacting to it and trying to investigate and punish it after the event. In short, we all need to make our countries as unwelcoming to financial criminals as we possibly can.
Doing nothing is not an option. At the rate of fraud loss estimated by Professor Levi and his colleagues for ACPO, and even assuming no intervening growth in the economy, we will just bleed at least £42bn into the pockets of financial criminals over the next three years!
The UK Government’s Fraud Review,4 published in July 2006, met with enthusiastic support from both the public and private sectors. In essence, the Review found that much of the existing effort devoted to countering fraud, especially fraud investigations, and much of the expertise and know-how lies in the private sector. It is crucial that this is combined with public sector efforts and intelligence in a coordinated attack on fraud. There are already successful regional and business sector initiatives bringing together public and private agencies in co-operation to alert consumers and industry, train investigators, share experiences and exchange information.
The Fraud review recommended that we bring to bear a concerted, National counter fraud Strategy, informed by regular and robust measurement and a National Fraud Reporting and Intelligence Centre. This strategy would focus all the disparate anti-fraud efforts being taken by public and private sector organisations into a single, informed response to the menace of financial crime and fraud.
The Review recommends shifting our emphasis towards pro-active prevention and away from simply reactive law enforcement efforts. We will never eliminate fraud entirely; but we can embed an anti-fraud culture that reduces the opportunities for fraud and makes the UK economy progressively less and less vulnerable.
These and other key groups of Fraud Review recommendations are being taken forward as we speak, under the direction of a Programme Board chaired by my Head of Policy at the AGO, Jenny Rowe. Working groups drawn from both the public and private sectors are preparing detailed implementation plans and budgets for a comprehensive package for tackling fraud in the UK.
But tackling financial crime is not just about the Fraud Review. As I explained just now, there are other important legislative components to the Government’s counter fraud strategy.
The Fraud Act came into force in January 2007. This Act for the first time provides us with a statutory offence of fraud. Not only does this give greater clarity to investigators and prosecutors; it also means that future statistics collected through the criminal justice system and the courts will be much more accurate.
Another weapon in our armoury, so to speak, is confiscation. Taking the profit out of crime is a powerful deterrent – some would say even more effective than prison. The Serious Crimes Bill currently before parliament here will give the prosecuting authorities in England and Wales powers to mount civil proceedings, for the purpose of confiscating criminal proceeds even where no prosecution takes place, or where the suspected criminals have been acquitted.
You may all be familiar with the celebrated case last year, in which the Asset Recovery Agency recovered £18.5m from an Irishman, Dylan Creaven, who had been acquitted of ‘carousel’ or missing VAT trader fraud. Creaven’s assets had been frozen and the Asset Recovery Agency was able to demonstrate to the civil standard of proof that a good part of these assets had been acquired unlawfully. A settlement of the civil case was reached, for the first time using the services of a Mediator (a senior member of the English Bar), with a result that I think we can all agree was wholly satisfactory. This was of course a case involving public revenues, not one involving individuals or vulnerable victims. But it shows what can be done using our law imaginatively.
Last but not least is our determination to overcome the remaining barriers to effective financial regulation and law enforcement through worldwide co-operation. We have equipped our courts5 with the jurisdiction to try criminal offences here when at least one element of the crime is committed here. Our principal prosecution agencies CPS, SFO and RCPO have international units that assist overseas law enforcement agencies to gather evidence in the UK for use in trials abroad. We have updated and simplified our extradition procedures. We are operating the European Arrest Warrant scheme. We are determined that criminals shall eventually have no hiding place from justice, and that the proceeds of serious crimes shall be traceable and recoverable anywhere in the world.
But no matter how effective are our efforts at home, we need to act as globally as the threat itself. In particular, those countries that benefit from open, deep, liquid financial markets have special responsibilities in creating a hostile environment for those who seek to abuse the system. In a major development in recent months, China has become a member of the Financial Action Taskforce – the global anti-money laundering organisation amidst a major programme of legislative modernisation of its money laundering rules.
It is crucial to the effectiveness of the global challenge to criminal finance that countries with major international financial centres play their full part.
Strong regulation coupled with a national determination to stamp out corruption, identify and seize dirty money and reduce opportunities for fraud have proved their worth in small nations as well as large. But it is an uphill battle. Wherever money flows freely- as it must, to promote commerce – it will attract criminals. All societies need to balance protective regulation with commercial freedom and innovation. There will always be those who slip through the nets. Even a Sarbanes-Oxley regime cannot entirely prevent fraud, and it may well have unwanted consequences for legitimate business that require rebalancing from time to time. That is the challenge for Governments now.
For additional information on the UK’s approach to tackling financial crime, read Combating Financial Crime.
1 The Nature, Extent and Economic Impact of Fraud in the UK; ACPO March 2007.
2 July 2007.
3 CIFAS 2007.
4 Fraud Review report July 2006, Government Response March 2007.
5 Part 1, Criminal Justice Act 1993 brought into force June 1999.