BY

PREM SIKKA
PROFESSOR OF ACCOUNTING
UNIVERSITY OF ESSEX
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White-collar crime is one of the fastest growing industries in the world. No one really knows the full-scale of the proceeds, but the amounts made from drugs, tax evasion, prostitution, theft of works of art, smuggling, money laundering and insider trading run into trillions of dollars. The illicit drugs trade alone is estimated to be worth more than $500 billion a year.

It is fashionable to assume that white-collar crime always involves someone else. Newspapers routinely draw attention to the Mafia in Russia and Italy, the Japanese Yakuzah, the Chinese Triads, the Caribbean Yardies, the drug traffickers from Afghanistan and the Colombian cartels. It is always someone else rather than the civilised Brits or Americans even though virtually all the proceeds go through Western banks. More recently, the Bank of New York, Coutts and others have come under the spotlight. Companies registered in the UK and Jersey enabled the Russian Mafia to spirit away billions of the IMF loans. UK based accountants and lawyers are involved. This ‘foreign’ phobia prevents reflections upon the broader factors.

The huge growth of the white-collar crime is a constant reminder of the failures of the present institutional structures. In this article I want to argue that any durable fight against organised white-collar crime requires a restructuring of the world economic relations. Governments also need to tame offshore financial centres, introduce tougher regulation of accountants and curtail the culture of secrecy that prevents the public from making a fuller contribution.
 
RESTRUCTURE THE WORLD ECONOMY

The idea that foreign nationals are involved in organised financial crime provides very convenient scapegoats. This discourse is so well amplified in the press that we rarely pause to think about the plight of the individuals so easily labelled as deviants. No doubt, there are bent and deviant individuals and groups in all societies. But individuals are not born as money launderers or drug-traffickers. Rather the contemporary social, economic and political arrangements turn ordinary people into deviants. Consider the case of the South American countries that are routinely associated with the drug cartels. Most of the countries are burdened with huge foreign debt and high rates of unemployment. The present generations have not been the direct beneficiaries from the debts, but are required to service and repay them. Large amount of the industrial and agricultural production is used to pay interest on the debt. These countries may have some minerals or unique agricultural products (e.g. coffee beans), but the prices of these products and commodities are fixed in the Western world.  The interests of Western consumers, corporations and governments take precedence over the needs of the local people. In the global economy, countries such as Colombia have little autonomy. It exists at the periphery of the world markets. Faced with crippling debts, high interest costs and poor prices for their products, how are the Colombians to survive and feed themselves? The narcotics trade, with all its dangers, is about the only lucrative trade left. It gives them autonomy, hard Western currency and a way of surviving in the jungle of the global economy. The Western governments may disapprove of the narcotics trade, but no amount of preaching is going to fill the bellies of the hungry people, or give them shelter and clothing. In short, the structure of the world economy and its exploitative structures have to accept some responsibility for much of the drug trafficking. Without writing-off the crippling debts and a major restructuring of the world economy, people in poorer countries will have little economic incentive to abandon the narcotics trade.

 CONTROL THE OFFSHORE ECONOMY

All over the world, the governments have been fighting a losing battle against white-collar crime. One reason for this is the secretive offshore economy. Tax havens are nesting grounds for criminal gains and untaxed profits. Indeed, most of the deposits sitting in these out-of-the-way places are there to avoid scrutiny by regulators and taxing authorities. Many havens (e.g. Jersey, Guernsey, Sark, the Isle of Man, and Gibraltar) have virtual banking systems and  are sponsored and protected by the UK government.  It is estimated that at least 10% of all the deposits held in offshore havens represent either the proceeds of tax evasion or drug money.

Jersey, with a population of 86,000 has bank deposits, trusts and nominees of nearly £400 billion. Yet Jersey does not have a major industry or any inward investment. Its banking sector employs just 5,730 people. Unlike New York, London or Frankfurt, Jersey is not known for enabling companies to raise finance, or for lower cost of capital. Jersey is attractive because it enables international capital to escape its social obligations of paying tax and because it asks no questions. Secret nominees with secret bank accounts can form companies. There is no need to have audits or file audited financial information. Last year, a UK Home Office report  showed that Jersey does not have even the basic institutional arrangements for combating white-collar crime. Without reforming the offshore boltholes, the prospects of putting even a minor brake on the rise in white-collar crime are remote.

CALLING ACCOUNTANTS TO ACCOUNT

Money laundering is not just the exclusive domain of offshore financial centres. Even in the major international financial centre, such as London, companies can be formed with minimum issued share capital of just £1 and used for legitimate and illegitimate purposes. According to the Financial Action Task Force (FATF) accountants facilitate illicit activities through the establishment of shell corporations, trusts and partnerships. Working through these business entities, they spin webs of intricate transactions to mask the origin of criminally derived funds and to conceal the identities of the parties and beneficiaries. In many cases professionals (e.g. accountants) act as directors, trustees, or partners in these transactions, or they will supply nominal directors, trustees, or partners. In a global economy, the operators don’t carry billions of dollars in suitcases; instead the money is turned into transactions, cybercash, credit cards, offshore accounts through a labyrinth of misleading paper trails. Accountants (and legal experts) stand to collect as much as 20% of the laundered proceeds for  their services.

On a number of occasions, the National Criminal Intelligence Service (NCIS) has  concluded that criminals use accountants to launder money. The NCIS statistics also show that accountants are the least likely of all the professional advisers to report suspicious transactions to the regulators. This is hardly surprising as accountancy firms are mainly concerned with being commercial and performing a service for the customer rather than on being public spirited on behalf of either the public or the state. Anyone familiar with Maxwell, BCCI and other scandals knows that accountants/auditors have been experts at aping the three unwise monkeys. The concept of ‘confidentiality’ of information provides a very convenient cloak for prioritising private economic interests over the very public concerns.

The UK government could end the practice of nominee shareholdings and company registrations and thus make it difficult for professional advisers to provide fronts for shell companies engaged in money laundering. But it has not. The government has failed to impose any explicit statutory duty upon accountants and auditors to report money laundering to the regulators.  Instead of creating independent regulators, the government relies upon self-regulation to call accountants to account. The professional accountancy bodies have no independence and also have a history of  covering-up the involvement of accountants in money laundering .  The self-regulatory system has no proposals for diluting the accountants’ ability to hide behind arguments of ‘confidentiality to clients’. No regulator has taken statutory powers to examine any files and documents held by accountants.

END THE CULTURE OF SECRECY

Combating money laundering requires greater openness, public accountability and empowerment of stakeholders, but deregulation, secrecy and the reduction of public scrutiny and accountability has been the UK’s main political ideology. The public provision of information can inform the public and enable people to look out for the tell-tale signs of scams. It also stimulates debate and further research so that more informed public policy choices can be made. Yet the British tradition is that of secrecy. Successive governments have preferred to keep the public in the dark. Few examples will help to make the point. The Bank of Credit and Commerce International (BCCI) was a fraud-ridden empire. It was involved in money laundering and organised fraud. The Bank of England commissioned a secret report codenamed ‘Sandstorm’ on the extent of frauds at BCCI. The report formed the basis of the Bank of England’s decision to close BCCI. In a subsequent inquiry, the US authorities requested a copy of the Sandstorm Report, but the UK authorities refused to provide it. Eventually, the Bank of England provided a censored version of the report consisting of some selected excerpts. What was it trying to hide?

Following the US ‘freedom of information’ laws, the censored Sandstorm Report was
placed in the library of the Congress, especially as the report did not pose any threat to security or the intelligence services.  It is publicly available in the US. However, the same censored Sandstorm Report has not been made publicly available  in the UK.  Prime Minister, Tony Blair, insists that the Report is ‘confidential’ and adds that even after the enactment of the UK’s ‘freedom of information’ legislation, such reports will remain confidential.

An independent investigation of the BCCI audits conducted by Price Waterhouse (PW) might have focused attention on the contents of the Sandstorm Report. The firm might have had to explain how it managed to act as an auditor, an agent for the Bank of England and as an adviser to the BCCI management. For example, according to the Sandstorm Report, PW advised BCCI to move its treasury function from London to Abu Dhabi, which subsequently made it difficult for regulators to have a full oversight of the BCCI operations. But BCCI audits have not been the subject of an independent investigation.

The British pre-occupation with secrecy and protecting vested interests is deeply entrenched. Under the Financial Services Act 1986, the government can investigate the affairs of companies involved in fraudulent dealings, but the legislation does not require the government to publish any information. Investigations can be carried out under the Insurance Companies Act 1982, but no reports are required to be published. Most company investigations are carried out under Section 447 of the Companies Act 1985, but no public information if given. Major investigations are also carried out under Section 432 of the Companies Act 1985, but the Ministers retain the discretion over the possible decision to  publish the reports. Many remain unpublished .

Any fight against organised crime requires public debates and public policy choice decisions. Without information and debate, Parliament cannot scrutinise the effectiveness of regulators and enact better legislation. Without information, the public cannot act as the eyes and ears of the regulators. Crime flourishes in dark places and without the sunlight of public scrutiny, it cannot be tackled.

There is no sign that the powerful nations are willing to restructure the world economy to enable poor people to live fulfilling lives. The European Union and the Organisation for Economic Co-operation and Development (OECD) are willing to scrutinise the offshore havens, but the deeper reforms are likely to be resisted by some governments, such as the UK which is more concerned with the narrow interests of the City of London. With all governments now bowing down to the organised corporate lobbying, the political will to call accountants to account  is weak.  With all governments becoming obsessed with reducing public expenditure, rolling back the state and encouraging deregulation, the prospects for  more openness and accountability are remote. Thus white-collar crime would continue to increase at an exponential rate. Only if the governments had the political will.