By Rowan Bosworth-Davies, author of Fraud in the City: Too Good To Be True, (Penguin 1988), a former head of investigations at regulator FIMBRA (Financial Intermediaries, Managers and Brokers Regulatory Association) and a former Scotland Yard Fraud Squad detective. He blogs at Rowan Bosworth Davies blogspot and tweets at @RowanBosworth Cross posted from Ian Fraser’s blog

“Go where you will, in business parts, or meet who you like of businessmen, it is – and has been for the last three years – the same story and the same lament. Dishonesty, untruth, and what may, in plain English, be termed mercantile swindling within the limits of the law, exists on all sides and on every quarter…”

No, this is not a comment from a contemporary website. It comes from an editorial published in Temple Bar – A London Magazine for Town and Country Readers in 1866. It was written at a time when England was experiencing a plethora of fraudulent offerings in railway shares, but the tenor of its complaint is as relevant today as it was then.

There is a growing groundswell of informed opinion among modern commentators and even some politicians that financial regulators should be far more willing to bring criminal charges against those financial practitioners whose actions should be construed as more than just negligent or incompetent.

I have never understood why ‘white collar’ criminals should be treated any differently from any other criminals, but the fact remains that they are treated differently, and it has been so for many years. The phenomenon was first recorded in a book entitled White Collar Crime by the American criminologist Edwin Sutherland, published in 1949. He pointed out that

“There is a consistent bias involved in the administration of criminal justice under laws which apply to business and the professions and which therefore involve only the upper socio-economic group…”

In White Collar Crime, Sutherland argued that the behaviour of ‘respectable’ people, from the upper socio-economic class, frequently exhibits all the essential attributes of crime, but that it is rarely dealt with as such. This situation had arisen, he said, from the tendency for systems of criminal justice in Western societies to favour certain economically and politically powerful groups and to disfavour others — notably the poor and unskilled who comprise the bulk of the visibly criminal population. He added:-

“Probably much more important however, is the cultural homogeneity of legislators, judges and administrators with businessmen. Legislators admire and respect businessmen and cannot conceive of them as ‘criminals’; businessmen do not conform to the popular stereotype of the ‘criminal..”

Another American sociologist William Chambliss put it as follows:-

“One of the reasons we fail to understand business crime is because we put crime into a category that is separate from normal business. Much crime does not fit into a separate category. It is primarily a business activity..”

In his research, Sutherland discovered that the ‘white collar’ criminal has no real fear of regulators ,and that actions by the regulators were considered to be an unfortunate interlude, but had little ability to exclude malefactors from continuing to trade. Sutherland found that the actions of regulators were seen as a bureaucratic part of a governmental process, and not considered to possess a status which would diminish the perpetrator in the eyes of his social peers. He said:-

“white collar criminals customarily feel and express contempt for law, government and regulators in a way similar to that in which professional thieves express contempt for policemen and judges. Businessmen characteristically believe that the least amount of government is the most desirable state.”

This was confirmed by my own experiences of dealing with white-collar criminals at both the Metropolitan Police and at Fimbra. It was further reinforced by some academic research I undertook. This explored whether or not a guilty verdict for the criminal offence of dishonesty would have an exclusionary impact upon a financial markets practitioner. One financial criminal said to me rather ruefully

“the white collar sector always assumed that its wrongdoing would be treated somehow differently from other crimes…’

In what is the most systematic discussion of 19th-century business crime to date, George Robb (1992) notes the reluctance of the legal and criminal justice systems to intervene in the social differentiation of the treatment of white collar criminals. He states;

“From the mid-19th century through the early decades of the 20th, the law put few obstacles in the paths of white collar criminals, trusting instead that the free market would regulate itself and that good business would drive out bad. The liberal outlook was taken up by the law courts which neglected business frauds and treated white collar criminals with comparative leniency. Throughout much of this period, cultural perceptions of ‘criminality’ remained focused on the ‘dangerous classes’ while elite misconduct was seen as a relatively minor social ill.”

He highlighted the fact that the harshest sentences for ‘white collar’ offences were invariably reserved for embezzling clerks rather than leading businessmen. He argued that another factor caused such leniency:-

“Another reason frequently given for the lenient sentencing of most white-collar criminals was that the shame and social disgrace attendant on criminal conviction were punishment enough for middle-class persons. Exclusion from polite society was viewed as a more serious penalty than imprisonment … For white collar criminals, prison was seen as ancillary to their personal sense of shame and loss of social status”

I wanted to test how effective this social exclusionary factor would be for a financial practitioner found guilty of a crime. My research set out to establish how financial practitioners would respond to the news that one of their social and commercial circle had first been suspected of, and then convicted for committing offences of insider dealing (a regulatory issue in their eyes), as opposed to the offence of theft (a criminal offence in their eyes). In doing so I wanted to test Sutherland’s assertion that regulatory offences were considered less important than criminal offences and would not carry the same degree of social and commercial exclusion.

In the course of a questionnaire which was completed by 93 financial services practitioners, I posed the following questions.

“A person in another company who you have known socially for a long time and with whom your company has done business for many years has been reported in a serious newspaper as being suspected of Insider Dealing. How would this report impact on your social dealings with them?”

The conclusions of this research were that, in business dealings, conviction of a criminal offence places the convicted person in a very defined capacity as far as financial practitioners are concerned, which is in a marked contrast to their social position. The research showed that while financial practitioners are prepared to tolerate breaches of the social code — borne out by the fact a greater percentage are prepared to continue a social relationship with a convicted person — in business, the vast majority were unable to continue any relationship with a convicted person. I believe the figures reinforce Sutherland’s theory that breaches of the business code are considered more seriously than breaches of the social code.

Overall the statistics bear out the theory that financial practitioners believe they have little to fear in the actions of regulators, because whatever the outcome, the penalties do not lead to social or commercial exclusion from the financial sector. Fines have no impact on the individuals in the banks, instead, their impact is only felt by the shareholders.

However, what clearly works beyond any other measure is a conviction for what could be termed ‘an ordinary criminal offence’. It immediately places the defendant in the ranks of ordinary mortals, and its commercial exclusionary impact has been amply demonstrated. Being convicted of a crime is the route to the door marked ‘exit’, and it means that the convicted person can never come back into the City because no-one will be willing to work with him or employ him in future.

It must be hoped that we will not have to listen to any more special pleading on the part of the regulators that there are other, better methods of regulating the financial sector, methods which have a greater deterrent effect, because there are none! In addition, criminal convictions lead to asset seizures, and financial recovery proceedings, enabling ill-gotten gains to be recovered. The proceeds of the crimes become launderable and any other person who has facilitated in their distribution or dissemination can be prosecuted for money laundering.

For these reasons, we must insist that government implement an urgent review of the powers of the regulators to bring criminal prosecutions, and their relationship with the Serious Fraud Office and the Crown Prosecution Service to be upgraded and given far more flexibility, in the hope that we shall see many more errant bankers being forced to grip the rails at the Old Bailey.

I strongly believes that a few selected prosecutions and convictions would send such a shock-wave through the ranks of the hitherto spoiled and arrogant financial practitioners so that they will quickly lose the mistaken perception that they are a ‘protected species’.