A few weeks ago, I saw an article in the press “Firms could face fines for failing to prevent fraud” (see here). It resurrected an idea that companies, and their directors, could be liable for financial crimes (see LIBOR and others ad nauseam), if they had failed to put in place adequate detection and prevention measures.


It wasn’t specific to any one initiative, but had obviously been floated on a non-attributable “lobby” basis to see what reaction it got. “Vindictive” was one.

According to the article “Law-abiding firms would have nothing to fear”. This is a standard formulation often used to justify erosion of civil liberties, and for forcing unpopular ideas on an unwilling populus. Indeed William Hague, UK Foreign Secretary, said last year “If you are a law-abiding citizen of this country going about your business and your personal life you have nothing to fear about the British state or the intelligence services listening to your phone calls or anything like that.”

But does the idea have any merit?

We are now used to the idea of Corporate Manslaughter, where a company’s directors can be held liable for a death caused by their company’s negligence, and Health and Safety legislation has long allowed for prosecutions based on failure to apply minimum safety standards.

Is the damage caused by Corporate Fraud the same as Corporate Manslaughter?

Perhaps it is.

It is impossible to quantify the thousands, or perhaps millions, of people who have suffered hardship due to financial fraud, be it boiler room scams or the alleged manipulation of Forex rates. But there are real human consequences, with reports of suicides linked directly to losses sustained due to fraud, the most high profile perhaps being Rene-Thierry Magon de la Villehuchet, who invested, via his investment fund, $1.4 billion into Bernie Madoff’s Ponzi scheme.

How accountable should companies be? And what can they do to help themselves?

The real issue is that companies are swamped by information that drowns out their ability to spot suspicious behaviour. Structured systems are often circumvented to make it appear on paper that there is not an issue, while huge losses are concealed (Nick Leeson used an “error account” (number 88888, considered lucky in Chinese numerology) to balance out losses).

We are seeing moves by large banks to try to sift this pile of information, but it requires a number of things:

1. People: At the end of the day, computers can only tell you so much. Faced with a million haystacks, knowing which haystack to find the needle in is a good start, but often you need a human being to stick their hands in to get their finger pricked.

2. Integrated systems: Too often data is siloed, and under the control of different departments. Having one view over the data can be almost impossible, but there has to be a will to co-operate across departments and geographies to tie up data and make it more accessible

3. Money: More people and better systems requires investment. Over time, that should save money in reduced financial exposure and more streamlined systems, but upfront there is a cost.

It is perhaps a knee-jerk reaction to hope that a whole load of senior bankers should be jailed for their part in the recent financial scandals. But there is no doubt that more should be done to try to prevent this type of activity, so maybe it’s time to get the big stick out.

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