One thing about working in a Business School is that you see the disconnect between business in theory and business as it is actually practiced. Something that is rarely mentioned when it comes to the British economy is the issue of corruption.
I was thinking about this whilst reading the excellent CLASS/IER pamphlet by David Whyte called the Mythology of Business. David is a Professor at Liverpool University and one of his previous books is called ‘How Corrupt is Britain?’
Well the answer is very. In the past it was only addressed when doing business with “Johnny Foreigner” now it is an integral part of how our economy works. Most studies of corruption readily identify that it is not a question of wickedness but a question of opportunity.
In a country like Britain with well-developed legal and accountancy systems that opportunity is rare at the lower levels. Foer example it is still rare for a police officer or a planning officer to take a bribe because the risks out way the benefits.
The opportunity almost always accrues to the better off none of the corrupt practices you read about, from MPs expenses’, phone tapping in the media, price-fixing by the utility companies, LIBOR rate-fixing in the banking sector; and falsification of evidence by the police at the Hillsborough enquiry are committed by the less well off.
Today the scale of corruption in Britain is vast yet the perception is the opposite this is partly due to the way corrupt practices are presented. Take the way the fraudulent selling of payment protection insurance by financial services companies was called ‘miss-selling’.
As if a systematic £24billion fraud could be committed by the slip of a pen.
The other issue is that not only are they are presented as crimes without victims but also as crimes without perpetrators. You may have heard of the Libor scandal, in which perhaps as many as 16 of those too-big-to-fail banks, have been manipulating global interest rates.
This meant altering the valuation of up to US$500 trillion (yes trillion) worth of financial instruments. MIT professor Andrew Lo says it "dwarfs by orders of magnitude any financial scam in the history of markets." The fines levied on the banks for this are also colossal so far six banks have agreed to pay US$5.8billion (including US$2.5billion from Barclays and US$669million from RBS).
So far only UBS trader Thomas Alexander William Hayes has been convicted as if he could do all this by himself!
Not only do we not take fraud seriously we actually facilitate it. Corrupt oligarchs from around the world need somewhere safe to store their ill-gotten gains. One of the safest is right here in what has become known as the buy-to-leave market.
At a time when people across London are desperate for a place to live there are some 36,000 empty properties in this category across the city. Transparency International the NGO that specialises in corruption issues estimates that around a tenth of the properties in Westminster alone are now owned offshore and anonymously.
The great scandal of our age is this Buy to Leave market, where new homes are developed, sold, then left empty by their owners for years on end. Why do they do it? If you buy property for, say £1 million and the value increases by 10% each year, after 5 years you can sell it making a pre-tax profit of £500,000 a better return and more secure than other investments – and you don’t have to worry about pesky tenants. Whole streets and apartment blocks across the country are lying empty.
Billions of pounds of corruptly gained money is being laundered by criminals buying upmarket properties through anonymous offshore front companies turning London into the world capital of money laundering.
Even arch advocates of globalisation are beginning to see the problem, Leonard McCarthy, of the World Economic Forum, asks, “Has Globalization Made Corruption Worse”?
“When the collapse of a bridge or building leads to preventable deaths, it’s worth digging around to see if bribes were paid. We see a consistent pattern, of companies cutting corners on safety and quality in order to recoup the cost of the bribes they pay government officials to win contracts. Even something as mundane as waste removal, which does indeed have an impact on the environment, can be distorted by corruption. The problem with fraud and corruption is that they prevent good solutions and sound policies from reaching their full potential.”
What is more McCarthy suggest that, globalization can be held responsible for this increase.
“However, many also cautioned that while increased international attention has helped move the anti-corruption agenda forward, globalization is responsible for an increasingly sophisticated form of corruption. We have to ask whether corruption-fighting solutions have kept pace with the integration of financial systems, global supply chains and multi-jurisdictional entities.”
These complex frauds are not committed by small back street crooks but by large multi-national organisations. Desperate for profits at a time of low global growth efforts to minimise tax liability easily slip over into totally fraudulent activity.
When the Government stops the fraud trial against BAe systems over the Al Yamamah contract with Saudi Arabia on the grounds that to proceed is against the national interest we can see that not only is corruption endemic in business it runs right to the heart of the state.
Whilst the trial was stopped in the UK proceedings continued in the US. Under a plea bargain with the US Department of Justice BAE was sentenced to pay a US$400 million fine.
US District Judge John Bates said the company's conduct involved "deception, duplicity and knowing violations of law, I think it's fair to say, on an enormous scale". Thanks to the plea bargain BAe was not convicted of bribery, and was therefore not blacklisted from future contracts. So as long as the US received their cut it was business as usual.