Barclays GroupJun 28 2017

Bringing bankers to book

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Bringing bankers to book

The Serious Fraud Office’s announcement that it will pursue legal action against former senior executives at Barclays is unique. It is the first time a senior banker has been legally charged in the UK for wrong doing during the financial crisis. 

The charges are the result of a five-year investigation by the SFO into Barclays response to the financial crisis in 2008. The particular focus was how the bank was able to raise money to keep itself afloat when global financial markets went into meltdown in October 2008. Unlike other major UK banks which sought a bail-out from government, Barclays sought to keep itself afloat by borrowing money from an investment vehicle from the Qatari government.

At the time, senior executives at Barclays were preoccupied with ensuring the bank was kept out of state control. Part of the reason for this may have been ideological – seeing public ownership as necessarily a bad thing. Part of the reason for this might have been about the external image of the bank – being bailed out by the government would be likely to scare away investors. But there was third, much more personal reasons, according to Lord Myners, the then City Minister in the government. Being bailed out by the government meant that there would probably be massive curbs on executive bonuses.  

There are two aspects of the deal which have resulted in these charges. First, when the bank raised £6.1bn from Qatar, the bank promised to pay fees of £322m for help in developing their business in the region. However, it is not clear what exactly these fees were for and where they went. The second more serious charge is that Barclays later loaned Qatar US$3bn (£2.35bn). The suspicion is clearly that Barclays was lending the Qataris money so they could in turn help bail the bank out. If this was the case, it is a case of ‘unlawful financial assistance’ – section 678 of the 2006 UK Companies Act. Roughly this states that a company cannot lend money to another entity which it then uses to purchase the company’s shares. This is designed to ensure a firm does not dilute its capital base.    

One feature of the charges from the SFO, which has caught the attention of the public is that this is the first time senior bankers are being charged for wrong-doing during the financial crisis. Following revelations about the manipulation of the Libor market, there have been a string of regulatory actions bought against banks. But many of these have involved the bank paying large fines. Rarely have individual been legally held to account for wrong doing. It is only recently relatively junior traders like Tom Hayes have faced criminal trials for market manipulation. No individual has faced charges related to the 2008 financial crisis until the SFO announced legal action against four senior executives at Barclays at the time who were involved with the deal. 

Often when corporations have been accused of wrong-doing in the UK in recent years, they have been offered a deferred prosecution agreement (DPA) by the SFO. This involves paying a large fine instead of going through a legal trial. For instance, Rolls Royce signed a DPA worth £497m to settle charges of bribery and corruption, and Tesco signed a DPA of £129m relating to accounting manipulation. 

The decision to focus on charging individuals rather the just the corporation as a whole is in line with changing doctrine in banking regulation. The current shared assumption is that holding individuals to account is more effective than charging corporations. Some worried that charging corporations can mean shareholders pick up the bill, while executives escape culpability. This means individual executives can take risks and reap the rewards in the short term, while longer term risks are actually carried by the shareholder. By holding individual executives criminally liable for their actions they would be likely to be more cautious. 

Until now, the UK has avoided persecuting individual executives. In the US, there is a stronger tradition of public prosecutors going after individuals. However, even there, holding individuals to account for corporate crime is relatively rare. In his analysis of hundreds of cases of corporate wrong-doing, Brandon Garrett found that in only 34 per cent of cases individuals were charged and in only 42 per cent of those cases they went to jail. The result is that individuals involved in the perpetration of wrongdoing often remained unpunished. 

There have been attempts to remedy this by holding more individuals to account. In the US the 2015 ‘Yates memo’ by the deputy attorney general Sally Q. Yates placed greater pressure on courts to hold individual executives to account for corporate crimes. In the UK, the large-scale inquiry by the treasury select committee placed recommended individuals be held to account for wrong-doing following the financial crisis.  

The desire to hold individual executives to account for corporate wrong doing is not new. Following a string of financial crises in the late 18th century, the Lord Chancellor Edward Thurlow pointed out that ‘corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like’. Following the financial crisis of 2008, we have been kicking and damning bodiless and soulless corporations - and sometimes kicking and damning the odd junior banker. Now it is the turn of senior bankers to be kicked and damned. 

Authorities clearly hope that pursuing prosecution against individuals will make other senior executives think twice before engaging in any financial shenanigans in the future. The threat of jail time is likely to sharpen the mind more than a big fine someone else has to pay. This may sounds great in theory, but there can be some problems in practice. Experimental research has found that people tend to go easier on individuals than they do corporations when doling out punishment.

This is because they assume that a corporation should have greater foresight than an individual. A second danger of blaming an individual is that it absolves a corporation from considering systemic issues which lead to the wrongdoing in the first place. In our own research, we found that when this happens corporations can forget the lessons of the past and go on to repeat the same mistakes again. 

It remains to be seen how the charges by the SFO will stand up in court. But what is certain is that the decision to pursue individual executives for wrong-doing certainly marks a significant shift in how we deal with corporate wrongdoing in the UK. 

Andre Spicer is professor of organisational behaviour at Cass Business School

 

Key points

The charges against Barclays' executives are the first time a senior banker has been legally charged in the UK for wrong doing during the financial crisis.

The current shared assumption is that holding individuals to account is more effective than charging corporations.

The authorities hope that pursuing prosecution against individuals will make other senior executives think twice before engaging in any financial shenanigans.