1
M.St Penology
Pen 1222
Homerton College
Rachel M Spearing
Supervisor: Dr. K Mueller-Johnson
Moral Contexts and Rule-Breaking in Investment Banking:
The Application of Situational Action Theory
Submitted in part fulfillment of the requirements for the Masters Degree in
Applied Criminology, Penology & Management at the Institute of
Criminology, Cambridge University.
January 2014.
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ACKNOWLEDGEMENTS
This study would have been impossible without the time and trust so generously
given to me by the investment bankers in London and New York. I would like to
offer my sincere thanks to those who participated in the research and assisted
with introductions to interviewees. I am also grateful for the patience and
guidance of Professor Per-Olof Wikström, Dr. Kyle Treiber and Dr. Katrin
Mueller-Johnson at the Institute of Criminology in relation to theoretical
considerations, research and the presentation of the study. Finally, I give my
heartfelt thanks for the love, support and encouragement received from my
family and friends, particularly from Gary and Aude.
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SUMMARY
This study explores the moral context of bankers in investment banking and the
application of Situational Action Theory in this environment. It was an
explorative study which used a snowball sample method to produce successive
waves. A group of 20 was selected using key targeted informants, and no reward
was offered. The bankers were the sole informants and provided insights
focusing on their environment.
The study reviews the literature relating to Situational Action Theory, white-
collar crime and banking regulation. It presents a qualitative evaluation of the
findings which were gathered with one-to-one interviews using a structured
questionnaire which was designed using a collective efficacy model to capture
the moral context of the environment and of the rule-breaking activity. The core
areas discussed were illegitimate rate fixing, mismarking of profit and loss,
insider trading and misuse of company privileges.
The findings support the proposition that Situational Action Theory (SAT)
establishes itself as a theory applicable to white-collar crime in the core areas
tested.
SAT and the framework and mechanisms used to explain the interplay between
crime and crime causation can be used within the context of investment banking.
They offer valuable factors for assessing the moral norms of the social and
situational dynamics of this environment. SAT should be considered a valuable
concept when shaping new policy and compliance procedures in the wake of the
restructuring which is taking place in response to the guidance offered by the
regulators’ and parliamentary reports which followed the recent banking
scandals and crisis.
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TABLE OF CONTENTS
I. Introduction page 6
II. Literature Review page 11
Background to the theory page 11
Situation Action Theory page 13
Perception-choice process page 14
The Moral Context page 15
Controls page 18
SAT: The causes of the causes page 19
Social and personal emergence page 21
Applying SAT page 22
III White-Collar Crime page 22
Scrutinizing the Powerful page 22
The definition of white-collar crime page 23
Lenience and legal lacunas page 26
IV Banking Regulation page 27
Historical Background page 27
The Regulatory Framework page 29
Parliamentary Banking Reviews page 30
V Research Method page 35
Specific research questions and design page 35
Participants and sample method page 36
Ethical considerations page 38
Participants and their general background page 39
Procedure page 40
VI Findings & Discussion page 45
The moral context of investment banking page 46
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Does rule breaking occur and is there an application of SAT page 46
Illegitimate Rate Fixing page 48
Mismarking profit and loss page 56
Insider Trading page 62
Misuse of company privileges page 64
Causal process influencing factors page 65
Limitations of the study page 66
VII Conclusions & Implications page 67
Conclusions of the study page 67
Criminogenic Opportunity page 70
Perception choice process page 70
Controls page 70
The process linking the causes and the causes of causes page 71
Policy Implications page 71
Future Research page 72
References
Appendix
Appendix A Participation Information & Consent Form
Appendix B Questionnaire used for one to one interviews
Tables Appendix C
Table 1: Participants and their general backgrounds
Table 2a: Perceptions of Illegitimate Rate Fixing within Investment Banking
Table 2b: The process of reporting, consequences of action & factors promotion
and deterrence.
Table 3a: Anecdotal observations of mismarking actions in Investment Banking
Table 3b: Perception of mismarking activity within Investment Banks.
Table 4a: Perceptions of insider trading activities in Investment Banking
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CHAPTER I Introduction
In 2008 the global financial crisis, sparked by the collapse of US mortgage-
backed securities, saw the banking industry thrown under the spotlight and
subjected to scrutiny. It was a global review and of public importance because
the effects of the crisis were felt throughout society, from government treasury
and corporate business through to the general public whose savings,
investments and future pensions had been in some cases subject to catastrophic
losses. The picture which slowly began to emerge and to be critically reported
by the investigating authorities was one of endemic practices and systematic
failures which encouraged reckless actions, poor internal controls, poor risk
management, dishonesty, and an industry driven by short-term goals such as
profit and personal bonuses which lead to corrosive and corruptive practices
(FSA 2012; HM Treasury, Department for Business Innovation and Skills 2013).
Prior to 1986, it would have been reasonably accurate to describe investment
banking in the UK as unregulated (Gleeson 2013). Over the last 27 years a
tremendous number of rules and regulations have been introduced to make
banking one of the most regulated commercial activities in the country. But the
actions of those working within the industry have caused the greatest concern.
The image of intelligence, respectability and high standards of ethics within the
economy and of safe corporate structures and governance has given way to one
of greed, self interest and reckless behaviour, and of management cultures which
at best appear complicit in such behaviour, and at worst cultivated it with
environmental pressures, corporate goals, and bad role models in management.
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(HL: Paper 133 2012). The result was a total loss of confidence among
institutions and a growth of distrust resulting in their being unable to play their
core role, financing economic growth, and in the loss of public faith and trust in
the management and governance of the banking industry, one of the pillars
which stabilises society.
Having worked in two investment banks between 1992 and 1995 in a capital
markets trading environment, I was particularly interested to read the media
and commissioned reports about the 2008 financial crisis. The conclusions
appeared to focus on what further organisation, regulation and statutory
legislation would be necessary to prevent the repetition of such problems, and
on a complex scrutiny of the individual causation of particular scandals. There
was little evaluation of the ‘causes of the causes’ in a wider context and how
these came to manifest themselves both personally and institutionally within the
banking industry. Whilst there was much comment regarding the greed and the
morality of bankers, the focus was on individual blame rather than reviewing the
environment in which the behaviour occurred. But criminological theory, for
example Situational Action Theory predicts and researches the moral context of
the environment as an indicator of whether individuals will choose to engage in
criminal behaviour. This study aims to explore this issue, applying the
framework of the Situational Action Theory of Professor Per-Olof Wikström.
Situational Action Theory (SAT) applies to all types of crimes (Wikström 2010)
but to date it has not been tested within a white-collar crime setting; this study
aims to fill this gap.
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SAT is a contemporary theory which describes crime as actions. Central to the
theory is the concept that the individual contemplates a ‘perception-choice
process, which is initiated and guided by the interaction between a person’s
crime propensity and criminogenic exposure’ (i.e. their own personal
characteristics and those of their environment) (Wikström et al. 2012). Further,
crimes can simply and effectively be analysed as moral actions (Wikström
2010a). This is not using the word ‘morality’ literally, but is interpreting it as an
action which a person contemplates based on the guidance of rules about what it
is right or wrong to do. This is a helpful device in the context of my study
because considering moral contexts in this way and using SAT does not rely
upon an analysis of whether laws/rules are good or bad (‘virtuous or
reprehensible’) but simply talks in terms of conduct which offer guidance about
whether it is right or wrong to do something. ‘SAT focuses on how moral rules
guide human action’ (Wikström 2014).
White-collar crime is a relatively new concept. It originated in academic
research from an American sociologist, Edwin Sutherland, who sought to
highlight illegal acts being conducted in business. It was defined initially as ‘all
offences committed by a person of respectability and in high social status in the
course of their occupation’ (Sutherland 1940). Ironically Sutherland’s studies
were criticised for being too unscientific as they covered areas which were illegal
but not outlawed by criminal statute, e.g. false accounting and anti-competitive
practices. There was much debate and division regarding the appropriate
definition of white-collar crime (Tappen 1947; Pearce 1976; Shappiro 1990;
Snider 1993). Arguably morality was at the heart of this debate, with some
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believing that the concept should be defined by that which was morally wrong
(mala in se) and that which was simply illegal (mala prohibita) (Edelhertz
1970;). But is has until recently been a concept that has been absent from thd
heart of business operation or of concern to the public. Studies by Sutherland
and others were seeking to highlight the issue that harm that can be done to
society by the powerful, a proposition that was unpopular and poorly funded in
research in the early years (Snider 1999). I shall return to this discussion in
more detail later in this thesis (Tombs and Whyte 2003).
This work was an explorative study which used the theoretical framework of
SAT and tested the evidence to examine whether there is any support for the
theory. I will set out and discuss the theory and framework within the literature
review section of this dissertation, with reference to the development of ‘moral
norms’ in banking regulation.
The participants were the key informants. Research was conducted via
structured one-to-one interviews with investment bankers from three different
types of business: public banks (large high street institutions), private equity
business (privately owned companies) and boutique hedge funds (groups of
individuals who are accredited to trade/manage investments and private funds).
These settings were identified to factor in the possibility of considering different
settings within these groups, and whether variants then emerged from the data.
The sample group was selected via a targeted key informant who then facilitated
the process with a snowball introduction to produce successive waves. It was
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very difficult to access the sample group and to obtain their trust and
cooperation. These trials and tribulations together with the ethical difficulties of
conducting this research will be explained in the method section of the study.
Whilst conducting the structured interviews I was always mindful to explain to
the banker being interviewed that the interview was constructed to encourage
them to comment as observers of their environment rather than to personalise
their answers. The interview was designed in such a way for ethical reasons and
to safeguard the interviewees’ disclosures. However I allowed the participants to
explain the reasoning behind their answers freely. In many cases this enabled
me to conduct a deeper analysis of their responses to their environment and
their own and others’ personal characteristics. Many shared their personal
experience of rule breaking and management culture which will be explained in
detail in the results and discussion section. Owing to the limitations in the size of
the sample group and the possible limitations of selection and response, the
results have been subjected to qualitative assessment.
Finally I consider the Parliamentary Banking Commission’s Report (HL: Paper
133. 2013) and the establishment of the commission in July 2012, in the wake of
the LIBOR scandal.
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CHAPTER II
Literature Review
Background to the theory
Critical criminologists frequently revisit studies considering the theories and
causation of crime, and many agree that, whilst producing statistical covariates
of offending and correlates of crime, the studies are often fragmented and poorly
integrated with theories (Matza 1964, Farrington 1992, Vila 1994, Wikström
2012). From the 1990’s onwards criminological theory centered on the issue of
self-control as the strongest predictor of crime (Gottfredson and Hirshi,1990).
Critics argued that self-control was poorly defined (Akers 1989) but the theory
was further developed on the basis of ‘conceptualizing crime and deriving from
that a concept of the offender’s traits’ (Gottfredson and Hirshi 1990). A number
of empirical studies tested this theory. Pratt and Cullen undertook a meta-
analysis of existing empirical data and concluded that ‘low self control was an
important predictor of crime’; however the theory was weaker in longitudinal
studies where other variables were present (Pratt and Cullen 2005). The concept
of self-control being split into two elements emerged with Tittle, Ward and
Grasmick’s studies (2006) where self-control was considered and divided into
the capacity for self-control and the desire for it, the latter part being the first
emergence of an element of ‘choice’. Choice is at the heart of Situational Action
Theory and marks it out from self-control theory because it described choice as a
unique two stage process involving both the person and the environment.
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The study of crime as a ‘situated transaction’ has been considered by
criminologists other than Wikström. Wilkinson and Fagan (1996) stressed the
importance of correlating information about ‘individuals in their settings, the
characteristics of those settings, and the rules and contingencies that dictate
their interaction’. Indeed others mooted the necessity of theory and research
coming together to develop a more complete picture (McGloin et al. 2012). But
without a clear conception of ‘(1) what crime is (i.e. what the theory should
explain), (2) what moves people to commit acts of crime (a theory of action), and
(3) how individual characteristics and experiences and environmental features
interact in this process (integration of levels of explanation), we cannot fully
address the causes of crime’ (Wikström 2004). Situational Action Theory (SAT)
‘aimed to integrate, within an adequate action theory framework, main insights
from criminological theory and research as well as theory and research from
relevant social and behavioural sciences’ (Wikström 2012). It is presented to
create a greater understanding of crime causation and is the only theory that
connects both the individual and the environment with situational choice.
Connecting the two requires the integration of causally relevant personal and
environment factors and the analysis of their interaction within the context of an
adequate action theory (Wikström 2010). Rule-breaking in banking has thus far
focused on the individual’s personal characteristics and the flaws in supervision
and control. The interaction using SAT is pertinent in the context of my study
because of the ‘emergent’ phenomena of bankers who commit dubious acts and
the questions for policy makers and enforcement regulators as to how best to
prevent future rule breaking behaviour. SAT proposes that prediction of risk
factors can be identified by considering the environment and the question of
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what moves people to commit crimes, and how individual characteristics,
experiences and environmental features interact in this process.
Situational Action Theory
The basic proposition of SAT is ‘that people are essentially rule-guided creatures’
(Wikström 2010a). Crimes are the commission of acts. To explain this ‘human
action (such as acts of crime) one needs to understand the process of rule-
guidance influences what action alternatives people perceive, and what choices
they make in relation to the motivations (temptations and provocations) they
experience’ (Wikström 2012).
‘SAT proposes that acts of crime ( C ) are ultimately an outcome of a perception-
choice process( ) that is initiated and guided by the interaction (x ) between
a person’s crime propensity ( P ) and criminogenic exposure (E).'
P x E C [Wikström 2012, figure 1.3.1]
SAT establishes itself as a theory applicable to all types of crime. It adopts a
normative and universally applicable definition of crime, suggesting that crimes
are actions that breach legal rules of conduct (Wikström 2010). These can be
described as moral rules because this does not differentiate as to whether they
are crimes or not. The advantage of considering crime as a moral action is that
the term is applicable to all kinds of action and equates them to rule-breaking or
abidance, therefore is not focusing on why people carry out an act, but rather on
why they break or comply with rules, which does not necessitate focusing on the
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judgment of the act itself, but focuses on the individual and the impact of the
environment on that individual (Wikström 2012). This is important in the
context of my study because it focuses on the process of the perception choice of
the bankers and allows discussion without trespassing into judgment of the
commission of the act.
Perception-choice process
‘Perception-choice process’ is the process with which an individual makes a
decision, deciding either to take action or to choose inaction in relation to a
motivation (temptation or provocation). This can either be conducted in an
‘automated’ (expressing a habit) or ‘reasoned’ (making a judgment) way,
depending upon the circumstances and setting (Wikström 2012). To understand
the correlates between the two we need to understand the process that moves
people to act in one way or another. People act on their motivation, depending
upon the interaction between their criminal propensity and the criminogenic
features of the environment (settings) to which they are exposed. Since SAT
addresses the interaction between individuals and settings, I believe that its
concepts and mechanisms can be observed in the context of rule-breaking by
investment bankers.
The mechanisms of the situational process can be set out simply as follows:
(1) Motivation (goal-directed attention) initiating the action process;
(2) The moral filter (the interaction between personal moral rule and the
moral norms of the settings) guides what action alternatives a person
sees in relation to a motivation;
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(3) Controls (self-control and deterrents) influence the process of choice
when a person deliberates and there is conflicting rule guidance
(Wikström 2014).
The moral context
‘If they are true to their calling, all criminologists have to be interested in
morality’ (Bottoms 2002). SAT proposes that crime is moral actions. ‘A moral
rule is a rule that states what it is right or wrong to do in a particular
circumstance’ (Wikström 2011). Crime can be evaluated by considering why
people break the rules and the effects can be explained using a theory of
causation. The law is a set of moral rules of conduct. SAT does not require the
existence of the law, only the existence of moral rules (Wikström 2012). This is
important in the context of my study which aims to focus on seeking to explore
what this proposition means in the context of investment bankers.
‘Understanding crime as action helps us comprehend the role of “systemic
factors” and the role that social change can have on crime causation’ (Wikström
2010).
Morality and Moral Norms
However, analysing crime as moral actions does not involve a ‘moralistic
approach’. SAT is not testing whether the actions are good or bad, but rather
offering guidance on how moral rules guide human action (Wikström 2011). It is
the balance of situational (moral norms) and social (moral settings) as a ‘moral
filter’ that determines whether a person will see an act of crime as an action
alternative in response to a particular motivation. This explains why individuals
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will react differently in the same setting; the principle of moral correspondence
states that ‘if there is a correspondence between the person’s personal moral
rules and the moral norms of the setting, the person is likely to perceive his or
her action alternatives accordingly. If the person’s moral rules encourage
abidance by a particular rule of conduct and the moral norms of the setting in
which he or she takes part also encourage abidance by this rule of conduct, he or
she is unlikely to see a breach of this rule of conduct as an action alternative’. If
the contrary exists then the person is likely to see the breaking of the rule as an
action alternative (Wikström 2011).
‘Moral norms’ are developed within an environment according to the extent to
which they encourage or discourage the breaking of particular laws in relation to
the opportunities a setting provides and the frictions it creates (Wikström 2014).
This is an important concept within my study due to the development of certain
types of ‘cultures’ within the banking industry which have been described as
sub-cultures of deviant behaviour which corrupt practices and are divisive of
compliance policy (Gleeson 2013). SAT is a complex contemporary theory and
due to limitations of time, the sample and data available, this study will focus on
the moral context of investment bankers, situational and social factors, and the
dynamics which give rise to rule breaking.
Of interest to the theory of SAT, and relevant to my study of bankers, is how
people develop their particular moral rules. According to the theory of SAT this
occurs through a process of ‘moral education’, i.e. the way ‘people come to
acquire particular moral rules and their attached moral emotions through
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processes of instruction, trial and error, and observations of reactions to and
sanctioning of others actions’ (Wikström 2011). This process could be
considered relevant in moving towards the ‘emergence’ of how a person comes
to acquire a criminal propensity or how an environment acquires a particular
criminogenity.
A person’s moral code is central to explaining whether a person will commit
crime as opposed to how they will commit it (Wikström and Svensson 2010).
Someone with a strong ‘moral compass’1 will make decisions based on certain
values (Wikström 2010) and is therefore unlikely to have to exercise self-control
or reflect upon the deterrents of their settings where there is a temptation or
pressure to break the rules. However an individual with a weaker constitution
will see crime as a legitimate alternative given their moral character is under-
developed, and they may fall foul to the pressures of their environment
(Wikström 2010). Weak morality and low levels of self-control are strong
predictors of crime propensity; however weak morality is the stronger indicator
of the two (Wikström and Svensson, 2010). Morality is therefore central to the
action theory, while self-control explains only a limited amount of information
about the cause.
Variations in crime propensity may occur due to the nature of the particular
crime. Some people may be prepared to engage in one type of crime (e.g. false
accounting) but not others (e.g. theft, fraud or sexual offences). SAT suggests
1 Adopting the language used by one of the sample group in describing moral values.
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that even with moral rules and the interaction with the setting there can be some
filtering between the norms of moral rules and moral emotions and
environmental settings. For example a person’s moral reaction to crime may
promote or restrict the action. If the person sees their behaviour as wrong then
engaging in it may evoke guilt or shame. However, if one is able to justify or be
praised for an action, then one may experience an emotion of self righteousness
or being rewarded for the act and will adopt this as a moral act (Wikström and
Treiber 2009). Morality may even be psychologically divided by means of a
cognitive process, thus distancing the act from one’s normal moral belief, causing
it to become justified as an isolated act, e.g. retribution for a previous act against
the individual or in recompense for another justified cause. This allows the
person to leave one role and adopt another moral position, thus avoiding
cognitive dissonance (Rothe and Mullins 2006).
Controls
Control can be complex and vary in definition within criminology. Within the
context of SAT the term means ‘any personal or social factors that (directly or
indirectly) influence whether or not a person follows or breaches the moral
norms and law of society’ (Wikström 2011). Controls may have ‘internal’ (via
self-control) or ‘external’ (deterrent) application and thus are part of the
situational process (Wikström 2012). As explained earlier the principle of moral
correspondence and conditional relevance of control play a key role in the action
choice of crime. The purpose of controls within SAT is the compliance with
moral rules when the person deliberates about whether to act on a certain
motivation (Wikström 2010a). Thus an individual potentially goes through a
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two-stage process when considering an action, control being exercised as self-
control in reasoning about a moral judgment, and control as an external
deliberation in considering the deterrents. These are distinctly different
processes, as moral rules impact upon the action alternatives, whilst controls
(may) impact action choice (Wikström and Treiber 2007). SAT is unique in the
situational application of controls in this way as other models tend to focus on
control as a personal characteristic. People naturally vary in their ability to
exercise self-control. The effectiveness relies upon ‘executive functions’
(cognitive abilities) which measure effective deterrents or properly evaluate
moral norms, i.e. if someone is under extreme pressure and experiencing acute
anxiety they will be less able to process an effective evaluation of the moral
norms and may be less fearful of the consequences. The effectiveness of
deterrents often relies upon the likelihood of intervention and the application of
sanction (Wikström and Treiber 2007). This is particularly pertinent in the
study of my bankers who break rules because contexts can become criminogenic
if they encourage crime as an action alternative.
SAT: The causes of the causes
The hypothesis of SAT is that all crimes are situational and thus the causes of the
causes are a convergence of personal causes of crime with the social causes of
crime. The social causes develop historically via criminogenic settings, emerging
and creating crime-prone environments, because people are within them who
are responding to their motivations and committing crime. Person emergence
occurs via criminal propensities manifesting within self and social settings
(Wikström 2014).
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There is some interplay between the two features of ‘life histories’ (personal
factors) and ‘social systemic factors’ (environmental factors) but these are
described as ‘the causes of the causes’, rather than the causes of crime
(Wikström 2012). Wikström asserts that by understanding how these individual
characteristics and experiences and environmental features interact, we can
then consider how to properly address the causes of crime (2004). But the
challenge is to identify what are correlates and what are causes. ‘When factors
become too numerous … we are in the hopeless position of arguing that
everything matters’ (Matza 1964). The danger of considering the identity of the
causes of the causes is that whilst a correlation or prediction may be implied, this
is not proof of causation, and thereby may be unclear (Farrington 2000). Thus
Wikström suggests that the focus should be on the causal process rather than the
individual risk factors (Wikström 2011a). The process linking the causes and the
causes of the causes is explained by SAT in the following points:
(1) Crime is ultimately the outcome of a perception-choice process.
(2) This perception-choice process is initiated and guided by relevant
aspects of the person-environment interaction.
(3) Processes of social and self-selection place certain kinds of people in
certain kinds of settings (creating particular kinds of interactions).
(4) The kinds of people and the kinds of environments (settings) that are
present in a jurisdiction are the result of historical processes of personal
and social emergence.
(Wikström 2012, Figure 1.6)
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This process is relevant in my study because, whilst one may not be fully able to
assess the personal characteristics underpinning a person’s moral context due to
data limitations, one can consider the processes within social and self-selection
contexts which affect the environments. This may have a bearing on the social
and personal ‘emergence’ of the recent types of activity within the banking
industry.
Social and personal emergence
The concept of emergence simply refers to how something comes into being
(Bunge 2003). Sullivan et al. suggest that using a framework which adopts ‘a
novel, conceptual and empirical framework’ will give a more accurate picture of
why crime occurs (McGloin, Sullivan, and Kennedy 2012). When developing an
emergence framework, one has to use blocks of ‘individual’ and ‘situational risk’.
These can vary according to theory. SAT proposes that people’s morality and
ability to exercise self-control are the key to propensity, combined with the
criminogenic setting of the environment within which they are situated and the
perception choice process which they use when deliberating. ‘Cognitive skills
development is the role key to social institutions’ with family, schools and peer
networks providing impact (Wikstöm 2014).
Social emergence creates criminogenic features according to the extent to which
moral norms and their enforcement encourage rule-breaking conduct. Of
interest in relation to my study therefore are the processes by which the
environments (settings) develop (1) particular moral norms and (2) specific
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levels of moral norm enforcement through monitoring or intervention, and (3)
the frictions that are created (Wikström 2012).
Applications of SAT
SAT is a relatively new theory and unique in its framework. However, its
application has been considered in other recent studies in connection with
torture (Jerath 2011), violence (Haar and Wikström 2010), young offenders
(Wikström and Svensson, 2010), compliance (Wikström, Tseloni and Karlis
2011), anti-social behaviour (Wikström 2011b), adolescence (Wikström 2009),
self-control (Wikström and Svensson 2008), terrorism (Bouhana and Wikström
2008), and radicalism (Bouhana and Wikström 2011). There have to date been
no studies applying SAT to white-collar crime.
CHAPTER III
White-Collar Crime
‘Scrutinising the powerful’
Tombs and Whyte suggest that corporations are becoming similar to states: they
battle for control of power in the global markets, and their ‘activities’ have
become hidden from regulators and the public in pursuit of dominance and
wealth (2003). These hegemonic practices developed post-war into settings
which create an oligopoly (where only a few control the market) leading to
corporate deviance, typified by power, privilege and secrecy (Simon and Hagan
1999).
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Research in the 70’s developed a ‘typology’ of white-collar crime which consisted
of:
1. Crimes by individuals on an individual or ad hoc basis [general white-
collar crime].
2. Crimes committed in the course of carrying out their occupations by those
operating inside business, government or other establishments, in
violation of their duty of loyalty and fidelity to their employer or client
[occupational].
3. Crimes incidental to and in furtherance of business operations, but not
the central purpose of business [organisational/corporate
crime/deviance].
4. White-collar crime as a business, or as the central activity [professional
white-collar crime/deviance] (Edelhertz 1970).
The definition of white-collar crime
The definition of white-collar crime was problematic for a number of years after
the concept was introduced by Sutherland in 1949. One of the key issues of
disagreement was the issue of the ‘development of social norms which became
harmful to society’ (Tombs and Whyte 2003). This paradigm is akin to part of
the framework of SAT. However progress in criminological research into white-
collar crime has been slow (Snider 1993). Snider’s studies reveal that
historically the funding available to review the acts and morality of corporations
was poor and it was not until the mid 90’s that major funding became available
24
in the US and UK (National Institute of Justice, Research Data, 1999, and Oxford
Research Project, 1995).
In 1996 ethical issues were ‘officially’ introduced into the definition of white-
collar crime. Simon had argued for a number of years that ‘measurable
standards of harm (damage) - physical, financial, and moral - constitute an
objective empirical standard by which the ethical dimensions of a deviant act
may be assessed’ (Simon and Hagan 1999). At the National White Collar Crime
Centre academic workshop held in Liverpool a broad agreement was reached on
including in the definition ‘planned illegal and unethical acts of deception
committed by an individual or organisation, usually during the course of
legitimate occupational activity by persons of high or respectable social status
for personal or organisational gain that violate fiduciary responsibility or public
trust’ (Helmkemp, Ball and Townsend 1996). This is the first time that a
definition has included concepts outside strict violations of the law. In my
opinion, leaning towards a concept of considering the moral context and
implications of rule-breaking, which may be both statutory and moralistic.
In this context ‘moral harm’ has been assessed as occurring where deviant
behaviour by elites creates deviance distrust and cynicism or alienation among
the rest of the population. Simon and Hagan use analogies in relation to
government scandals such as Watergate which resulted in a dramatic loss of
confidence in government and politics among the public. Similar financial
scandals in connection with insurance and mortgage mis-selling and public
losses which resulted in losses to the public are another example in the UK.
25
Large corporations who evade tax and are evasive and lie to the regulatory
authorities could also fall into this category and the events since 2008
demonstrate the ultimate knock-on effect on the government where public
confidence is damaged, especially when governments delay in intervening to
stop the wrong doing and wait until a crisis has developed.
But the trouble with white-collar crime has been that for so long both the
government and the public have neither categorised it as being serious nor have
they considered the damaging effects, both short and long term, of the behaviour.
White-collar criminals do not view themselves as criminals, and crime is not
their main activity (Simon and Hagan 1999). This distinguishes them from other
types of organised criminals; however I believe that there are behavioural
similarities between the two groups. Serious and organised wrongdoing is pre-
planned and conspiratorial, with potential individuals being identified and then
recruited into the action. White-collar crime may be considered to be possibly
more harmful than juvenile crime because of the resources that the powerful
elite possess.
Perhaps one of the reasons that the public has not viewed white-collar crime as
harmful to society is because of a lack of insight into the extent of the rule-
breaking. High profile trials such as the Guinness and Saunders frauds and the
UBS and Barings rogue trader prosecutions were complex and appeared distant
from the ordinary man on the street as opposed to knife crime or robbery which
have a much greater victim impact. Also unlike British crime statistics and data
which are publically available and freely reported in the press, financial and
26
banking crime is only revealed through the regulation process, through
transparency, reporting, investigation and sanctions, and ultimately criminal
prosecution. There has been much criticism by criminologists, politicians,
consumer groups and the police regarding the way in which regulatory
authorities act and the low number of prosecutions brought against individuals.
Lenience and legal lacuna’s
Criminologists have argued that white-collar criminals are treated differently
from other offenders (Pontell, Rosoff, and Peterson 2008). This raises a serious
question as to what impact this has on any deterrent effect or the way people
faced with an action alternative may perceive choices. This could arguably be
contributing to the criminogenic evolution of individuals and their environment
if one considers this in the light of the hypothesis and application of SAT. Often
the nature of individuals’ offenses, the social demographics of their backgrounds,
and the power of the organisations within which they work act as a ‘status
shield’ so that society could be not be blamed for feeling that ‘the rich get richer
and the poor get prison’ (Reiman 1995).
The absence of a lack of any criminal prosecution and transparent investigation
may lead the public to believe that the actions are due to incompetence, poor
controls, poor training and inadequate systems rather than dishonesty. But this
could arguably also be due to the sharp practices and skills of the lawyers who
are helping the organisations to evade culpability, thus being complicit in the
development of the moral conduct, are offering protection in connection with the
immoral behaviour, and are thereby complicit in the sense of ‘professional
27
white-collar crime’, an observation made by one of my sample group. This has
led to the regulators being criticised for their policies, practices, and
management and the ineffectiveness of their regulation and oversight of
corporations (HL: Paper 133 2013).
CHAPTER IV
Banking Regulation
History of Banking
The core business of investment banking is raising capital, sales and trading for
institutions and asset management companies, usually with non-retail clients.
This differs from the business of consumer banks, those that deal with the
everyday banking business of the general public. Arguably, until the financial
crisis in 2008 the general public had little idea of the day-to-day business of
investment banks, and saw them as remote and unconnected to their lives. Since
2008 and the collapse which resulted in several banks having to be rescued at a
cost to the tax payer with wider implications to savings and consumer
investments, greater awareness and interest is now levied towards investment
banks and bankers in general.
The City of London has became a centre for financial activity, housing global
operations within the square mile, and financial markets have experienced
staggering growth which continues to accelerate to service the global needs of
the world. The UK together with other common law countries (USA/Australia)
developed a combined regulatory and enforcement structure to manage the
sector. This historically evolved with the Securities Act 1933 and the Bank of
28
England’s supervision (Nelken 1994). The City of London operates uniquely as a
village with specific terms; however ‘many of the same factors that have
protected the City’s relative autonomy for so long persist and have contributed
significantly to the litany of scandals that have been a perennial feature of the UK
financial sector’ (Gillligan 1999). The incestuous nature of the banking industry
and the rule-breaking going on within it have been widely studied (Ashe and
Counsell 1990). In 1970 the UK moved to a system of self-regulation where
internal checks and monitoring were the responsibility of the institution.
However it was not until 1986 that the Financial Services Act was passed setting
out a regulatory system of acceptable practices and providing an external
monitoring body to oversea the functions.
The first regulating ‘Act’ created a statutory-based regulatory authority model
(the Securities Investment Board or SIB). This was a private company presiding
over a number of self-regulatory organisations (SRO’s) and assisting with
implementation and compliance with UK and European statutory rules,
regulations and directives. In October 1997 the UK established a new regulator.
The Financial Services Authority (FSA) were launched by the then Chancellor,
who promised that it would ‘be equipped with all the statutory functions and
powers needed to operate a single regime for authorisation and regulation of
financial services’ (Gilligan 1999). However, it appeared to lack the weapons to
engage in the promised combat and, following criticisms and concerns regarding
its efficiency and compliance with the present system, a joint committee of both
houses (Commons and Lords) was set up to examine the failings and make
proposals. They took oral and written evidence from a wide variety of sources
29
and ultimately produced the first joint report of the Joint Committee on Financial
Services and Markets 1999, which was later enacted as the Financial Services
and Markets Act 2000 (FSMA) (Penn and Moran 2012).
The Regulatory Framework
Since 2000 investment banking has been managed by the FSMA and the FSA,
with the Bank of England having operational policy responsibility and playing a
significant role in financial stability. This was amended slightly by the Banking
Act of 2009, making provision for the nationalisation of banks and amending the
insolvency provisions and financial services compensation schemes, following
the global financial crisis. Additionally, investment banks are subject to the same
directorial duties and responsibilities stipulated by the Companies Act 2006
which require them to honour their ‘fiduciary duties’ (responsibilities to
investors) and ‘director competencies’, by always acting with reasonable care,
skill, judgment and expertise in the management of the company. Investment
banks must have an organisational structure compliant with corporate
governance rules. ‘Good governance increases the probability that good
decisions will be made’ as it has been the regulators’ view that ‘poor governance
was a lead indicator of significant problems within the firm’ (Barker et al. 2013).
But this statement appears to have been continually revisited following crises
and scandals within the banking industry which have necessitated internal
investigation and external political review, and usually resulting in additional
regulation or a change of the way in which we regulate a business.
30
Following the global financial crisis commencing in 2008, the government
established a parliamentary banking select committee on banking standards,
with independent experts and consisting of cross party members and which was
to consider the present position with respect to the causation of the difficulties
and to make recommendations for policy change. The first report concerned
HBOS, a bank rescued by the Government and nationalised at the tax payer’s
expense; this was a ‘story of catastrophic failures of management, governance
and regulatory oversight’ (HL Paper 133 2013). But, to the surprise of the
committee, only one director, Peter Cummings, had faced regulatory sanction for
HBOS’ failures. This prompted criticisms that the FSA ‘had taken no steps to
establish whether the former leaders of HBOS are fit and proper persons to hold
the Approved Persons status’ (FSA para 83). Similar comments have been made
by criminologists studying failures to sanction reckless management (Reiman
1995). Research participants also commented on the lack of sanctioning in
general in relation to the core issues explored within the study, leading to the
creation of weaker environments within the schemes of control and deterrents
(See Tables 2b, 3b at pages 46 and 55). Poor management is not only an
indicator of a correlation with crime but is evidence within SAT of a contributor
to the causal process for establishing criminogenic settings and impacting
personal morality.
Parliamentary banking reviews
In June 2013 the Parliamentary Committee released their second report in two
volumes. This considered the changes necessary in the wake of their enquiry into
the LIBOR scandals and professional standards and culture in the UK banking
31
sector (Parliamentary Banking Commission 2013). The report exposed
‘shocking and widespread malpractice’, which ‘gravely damaged the reputation
of the financial sector … causing the public opinion and trust to fall to an all time
low’. The report found that the conduct failing had no shared causes with a single
resolution which would be able to restore the trust and repair the damage. But
they were concerned to report within their findings that ‘many junior staff who
may have done nothing wrong have been impugned by the actions of their
seniors’, a state of affairs which clearly had to end. Their report made a number
of recommendations which focused, surprisingly perhaps, not on more rules and
regulations to take control, but a better understanding of the way in which the
rules and controls were designed to act and what objectives they sought to
achieve. They too criticised the regulatory body responsible for management
and gave key guidance as to what actions would create a better environment.
These include ‘making senior bankers personally responsible, reforming bank
governance, creating better functioning and more diverse markets, and
reinforcing the powers of regulators and making sure they do their job. It was
suggested that a new offence be created to cover senior persons engaging in
reckless misconduct in the management of a bank which would carry a custodial
sentence (Parliamentary Banking Commission 2013).
The government were quick to respond in July; they adopted many of the
recommendations, confirming their intention to ‘plan to review the collapse and
produce guidance following HBOS and RBS, set a new banking standards regime
governing the conduct of bank staff, introduce a criminal offence for reckless
misconduct by senior bank staff, and take further steps to improve competition
32
in the banking sector’ (H.M. Treasury Report, Department for Business
Innovation and Skills 2013). In advance of these reports the government had
already reformed the failing FSA by reshaping the regulatory management
systems around banks. The changes took effect in April 2013 and were
described as ‘the dawn of a new era’ (Cable, p6 in H.M Treasury Report 2013).
This followed the perfect storm between 2008 and 2012 which saw the industry
ravaged by scandal, corruption, and malpractice so that it appeared to be totally
out of control.
The current regulatory duties are split between 3 executive functions, the
Financial Policy Committee (FPC) under the control of the government and
formulates policy and guidance and makes recommendations. The Prudential
Regulatory Authority (PRA), a subsidiary of the Bank of England, is responsible
for promoting stability and prudent operation. The Financial Control Authority
(FCA) is responsible for the regulation of conduct in retail, wholesale and
financial markets and for the infrastructure that supports those markets.
One issue which until recently has appeared to be absent from banking culture,
is ethics. In a speech given by the director of the FCA, when talking of the future
direction of the industry he emphasised ‘the need for firms’ ethics to be built
around their customers…’, He stated that ‘the various investigations and reports
of regulators had concluded that the cause is usually not about failure to comply
with the specific rules but rather the fundamental flaw in the firms’ business
model, culture or business practices’ (FCA Press Release 2.12.13).
33
Economists have commented that ‘banks and financial institutions appeared to
believe and behave as if ethic were not relevant to their business’ (Koslowski
2009). The only principles they followed were mathematical with emphasis in
the way in which the business was contractually constructed. The industry
appeared sheltered by lawyers’ due diligence and contractual clauses and
schemes aiming to offer them ‘protection’ from recourse to their conduct.
Similar observations were made by the FCA who, when seeking to investigate the
banks in accordance with their duties, were met with non-cooperation, hostility
and the ‘harboring’ of employees whose conduct necessitated investigation (FCA
2012). The lack of focus on the moral context of these environments both
‘socially’ and ‘situationally’ has left the industry bereft of conscience, as
demonstrated by the findings of the regulators and parliamentary enquiries. So
much actuarial assessment was involved in the banking process that numerous
studies have shown there were ‘hidden perils’, for example a contagion of over-
estimation of products, which caused ‘herding trends in behaviour’ (Koslowski,
2009). If this has been the findings of economists regarding the financial
catastrophes, then one can consider that the ‘herding trends’ of behaviour within
these institutions may be producing similar criminogenic and propensity trends
in relation to white-collar criminal activity.
The very nature of these environments and the FSA manual promoting ‘high
level standards, principles of business, management, and system control, and
ensuring that individuals are ‘authorised’ and fit and proper people, who are
trained and competent’ (FSA Handbook, 2013) should lead us to focus rather on
the morality of these environments, and the ‘self and social selection’ which may
34
occur as part of the compliance and prevention strategy for better regulation. In
these high octane environments ‘where there is a great measure of influence and
power, there must also be a great measure of conscientiousness and moral
awareness, because power itself is a moral or ethical phenomenon’ (Koslowski,
2009).
However we may be experiencing a paradigm shift in both prosecutions and
sanctions following the lack of previous lessons learnt. In July 2012 the FCA
brought proceedings for market-related offences against a proprietary trader at
Mizuho International. Having made findings against him they fined him
£175,000 and issued a prohibition order, preventing him from working within
the financial services industry. He appealed and the tax chamber hearing his
appeal allowed his appeal in relation to market abuse, ordering the FCA not to
take any further action, but in their judgment made a finding of fact that he had
lied to both the chamber and FCA. The FCA appealed this to the Court of Appeal
on the issue of the prohibition order, insisting that given the findings, even
though he had been cleared of the wrong-doing, the fact that they concluded he
had lied meant ‘he was not a fit and proper person’. The Court of Appeal agreed,
remitting the case to the Chamber who ruled that ‘in putting a false defence to
the FCA during the course of its investigation, and in maintaining that defence in
evidence before the Tribunal, he had exhibited a lack of integrity such that he is
not a fit and proper person’ (FCA v Hobbs 2013). The director of enforcement at
the FCA was quick to issue a statement stating that ‘[he] had failed to
demonstrate the standards of behaviour from a person in privileged position and
failed to act in his basic responsibility to act with integrity. If you cannot tell the
35
truth, there is no place for you in the financial services industry’. (FCA,
December 17 2013). This could see new ‘frictions’ emerging to combat the
phenomena of rule-breaking within investment banking and a strong basis for
the working of situational action theory in that setting.
CHAPTER V
Research Method
The research question was ‘moral contexts and rule-breaking in investment
banking: The application of Situational Action Theory
The purpose of the study was to analyse the moral contexts and types of rule-
breaking found in investment banking and to investigate whether there was any
support for the application of Situational Action Theory. With the research I
hope to gain an insight into the working environment in investment banks and to
consider and study the interplay between people’s criminal propensity and
criminogenic exposure using the framework of SAT, and to examine whether this
affected their involvement in crime and possible criminal careers.
The specific research questions for this research were:
1. To explore the moral context of the environment of investment banking.
2. To consider whether rule-breaking activity occurred.
3. To examine the application of the framework and mechanisms of SAT to
that environment.
4. To investigate the causal process and factors impacting individuals and
their environments and consider the implication for managing risk.
36
Participants and sample method
There were 20 participants in the study. 18 were interviewed, one pulled out on
the day of interview, and one withdrew consent following the interview.
Participants were selected using a targeted key informant, who then facilitated
with a semi-respondent-driven snowball sample of investment bankers who
were currently working or had previously worked within a primary trading
environment. Individuals linked to primary trading activities, i.e. traders, sales
representatives, analysts or management, were selected because their areas
were related to the area within which I had been employed and which I had
knowledge of. The environment was also selected because it is considered the
most volatile and stressful one in the banking business. This was relevant
because we know that stress and anxiety can impact the moral filtering process
(Wikström et al. 2012).
The snowball technique is often used for areas of research or for individuals that
are hard to identify or reach (Bachman and Schutt 2013). It is commonly used to
access and interview members of gangs and organised criminals (Wright and
Decker 1994; Decker and Van Winkle 1996). Unlike many others where
respondent-driven sampling was used, no rewards or gratuities were provided
for the respondent or peers. Each introduction produced successive waves into
the groups of interest. It was difficult to find willing participants from within
the targeted sample group. This was due to difficulty in accessing information
about suitable individuals, negative media press regarding the plethora of
banking scandals which has given rise to trust concerns, ongoing internal
enquiries and company sensitivities, and the general fears of individuals
37
regarding the confidentiality of their participation. There are, in my opinion,
some similarities between these two groups and the fears that they possess
regarding trust, disclosure, identification and investigation.
However it is not suggested that a completely random selection was made due to
the limitations of the study, outlined in the findings and discussion chapter. Due
to the difficulties experienced and the numbers approached, I used two strong
key informants who agreed to assist with contacting sample participants. Both
had in excess of thirty years experience within the banking industry and had
held global director positions within a public bank and a private equity business.
They agreed to provide an ongoing reference to other participants as necessary.
In seeking to recruit a suitable sample group it was necessary to use their
executive status in addition to the introduction for ongoing confirmation of my
identity and purpose of study, to validate the confidentiality agreement and the
issue of trust.
Following one of the interviews with a participant who was employed within an
institution under extreme scrutiny who then withdrew, I received threats of legal
action and was compelled to give undertakings to destroy data collected and
remove them from the study. Another participant who had been in regular
contact up until the day of proposed interview withdrew at short notice. The
peer who had provided the introduction received a hostile telephone call from
the participant’s managing director. He was accused of recklessness and
insensitivity towards their organisation for encouraging the employee to
participate in my research, hence compromising the organisation’s privacy.
38
These experiences lend weight to the propositions established in the study of
white-collar crime, that powerful corporations seek to misuse their ‘corporate
veils’ (a legal term used for allowing companies to operate privately) to allow
them to develop secretive, oppressive norms and operate beyond any public
scrutiny (Tombs and Whyte 2003).
Ethical Considerations
The study received approval from the Institute of Criminology Ethics Committee.
The research was conducted by asking participants to comment as ‘observers’ of
their environment. This provided safeguards against them specifically
implicating themselves or others in any criminal behaviour during the course of
their response to the questionnaire.
A participation information sheet was prepared (Annex A) setting out the nature
of the study, which was ‘to learn more about the working environment in
investment banks’. A statement was made explaining that I was seeking their
assistance as their knowledge and experiences were very important for a
complete and reliable picture to be obtained of what it is like working in
investment banking. I explained who I was and gave a brief summary of what I
was researching and the purpose of my study. I set out clearly how I would
communicate with them and what would happen with the information obtained.
Thorough transparency and detail was provided due to the fact that following
my short career within investment banking, I became a qualified criminal
barrister. I am presently on sabbatical from independent practice within a
common law set of Chambers, but I feared simple internet research of my
39
professional background could impact on participants trust and their willingness
to cooperate with my research. Therefore this information was provided at the
outset of the study.
Clear guidance was provided in the participation information sheet on how the
research would be conducted (via one-to-one interviews lasting approximately
30-40 minutes) and it was explained that the interviewees had the freedom to
participate and fill out the questionnaire to the extent they felt comfortable. The
need for participation consent together with their right to withdraw at any time
were included, together with a declaration stating that they had read the
participation information sheet and agreed to take part in the research. This was
designed to ensure that the maximum informed consent was obtained. I sought
permission to record the interviews advising that anonymous quotes might be
used unless they indicated otherwise. An additional binding confidentiality
clause was added to the consent form in order to reassure any participants who
raised concerns regarding the protection of their identity.
Participants and their general background
All participants emanated from a trading floor environment. This environment
was selected because I had worked within capital markets for three years at two
different American investment banks, and therefore, despite my experience
being historic, I had some appreciation of the business and its challenging
environment. SAT proposes that cognitive skills have a vital function in the
‘moral filtering process’ and the ability to properly evaluate perception choice
within its framework (Wikström and Treiber 2007). The trading floor is known
40
to be a volatile and stressful environment and, as is demonstrated in some of the
research findings, those individuals interviewed were insightful subjects in the
context of this issue. Several of the participants referred to the impact of
cognitive impairment due to ‘pressures’ such as stress, anxiety, exhaustion,
drugs, and alcohol. Despite my knowledge being outdated, I found the
participants were at ease when discussing my own history and I had a basic
comprehension of the general terminology used during the interview. This
proved essential both in conducting the interview and in evaluating the data.
The sample group had in the majority substantial experience within the banking
industry. Many of the individuals had held management positions in addition to
their core jobs. During the recruitment of the sample there was greater
reluctance to participate from those less experienced in the industry. Where
individuals had worked in more than one type of institution I asked them to
clarify the setting in response to some of their answers.
Procedure
Initial contact was made with a key informant with whom I had worked in the
City. He assisted with both the piloting of the questionnaire and the first wave of
snowball sampling. The snowball sampling process consisted of the participant
contacting a colleague and providing him or her with my participation
information sheet, together with confirmation that I was a known and trusted
individual. The new wave sample’s preferred contact details were then provided
to me and I made contact with the prospective participant. Contact was made by
phone and via my academic email; I provided a further copy of the participation
41
information and consent details and answered any further questions from the
individual. 75 people were contacted during a four month period to secure the
20 identified suitable for the final sample group. Recruiting the sample and
managing the interviews was a continual process for eight months. Many sought
additional reassurance and in order to secure participation I maintained contact
with them. I considered that the location and setting for the interview might
have an impact on the participants. I offered participants a choice of two venues
to meet at: a boardroom in Green Park or a private conference room in the Law
Society reading room. Some of the participants requested that the interview be
conducted within their working environment.
The interview was designed as a structured questionnaire, where the responses
could be measured using a uniform process. 16 of the 18 interviews were tape
recorded and fully transcribed. Two were transcribed from notes made during
the interview as they refused for the interview to be recorded. 16 were in the UK
and 2 were in the USA. All had worked in the US and UK investment banking.
The questionnaire was designed to capture quotes and insights suitable for
qualitative review rather than any complex quantitative data. This method was
used due to the size and selection of the sample group. The general approach of
‘thematic coding analysis’ was followed. Data was given labeling codes, data
themes collected and patterns considered using tables (Robson 2011).
The interview was conducted in a semi-structured way, allowing the participant
to reason their responses. Of the 18 interviews, 2 were conducted face-to-face in
a private office via Skype due to the respondents being in New York; all others
42
were in face- to-face interviews. 4 were conducted in a private boardroom, 5
were conducted on the trading floor, and 7 were conducted in other private
locations such as hotel lobbies, cafés, or private member club lounges. 3
participants were known to me from my time working in the industry, and the
other 15 were strangers.
The design of the questionnaire and the specific questions posed to bankers
were adapted from the collective efficacy model used by the PADS study.2 I
selected this model because it is an established measure for considering the
moral context of an environment. (Wikström, Trieber, Oberwittler and Hardy
2012). There has also been empirical support for the connection it makes
between structural characteristics and crime. The PADS model combines
residents’ reports of social cohesion and levels of informal social control in the
effort to intervene in cases of crime and disorder within a neighbourhood
setting. I saw the trading floor environment as analogous to this setting. Whilst
the PADS model focused on anti-social activity within the neighbourhood, my
questions were framed around known illegal acts perpetrated as white-collar
crime.
The four areas of illegal activity considered in this questionnaire were
‘illegitimate rate fixing’, ‘mismarking profit and loss within a trading account’,
‘insider trading’ and ‘misuse of company privileges’. After piloting the questions
and the potential problems with defining these activities, I included a definition
2 Peterborough Adolescent and Young Development Study
43
of what I understood each term to mean at the beginning of each of these
sections in order to clarify any ambiguity which might arise prior to addressing
each area. Illegitimate rate fixing was defined as ‘establishing the price of a
product or service illegitimately, exploiting knowledge or weakness, and acting
alone or collusively rather than allowing it to be determined naturally through a
free market’. Mismarking was defined as ‘valuation of a traders account at less
than the market rate by over or under inflation, or hiding assets that have been
bought or sold’. Insider trading was defined as ‘buying or selling securities by
someone who has access to material, non public information’. Misuse of
company privileges was defined as ‘using privileges preferred due to
employment in circumstances outside the permitted use, for personal gain’.
In addition to information about the four formal areas of specific actions, I
gathered very limited personal background data regarding how long the
interviewees had worked in investment banking, their role or the job titles that
they had had and the types of institutions that they had worked in. I applied
caution in seeking not to collect too much personal data in an attempt to
maximise cooperation in the main focus of the study as participants were
concerned that they should not be identifiable from the background information.
Members of the sample group were the exclusive ‘key informants’ in my data
collection. The PADS study sought access to education information, police
national computer records, conducted surveys, and had longer periods to gather
personal information. Due to limitations with time, data and the information
available the focus was on the moral context using their sole observations.
44
I grouped the type of institutions into public banks (large high street
institutions), private equity business (privately owned companies) and boutique
hedge funds (groups of individuals who are accredited to trade and manage
investments and private funds). All of these companies are subjected to identical
regulation but vary in their size, set-up, business model, operational activities
and management. This was designed to allow for analysis of whether there
were any variables or themes arising in the data collected from these different
groups. 16 had exposure to public banks, 4 to private equity companies and 6
boutique hedge funds. It balanced because many had worked in all types of
institutions and qualified their answers in relation to the responses to the
questionnaire.
The questionnaire in Annex B was amended following a pilot review of the
questions. After I had piloted them with a banker personally known to me, I
realised that participants would require reassurance as to why I was interested
in them, hence the short explanation was added regarding why I was asking
them to share their knowledge. I further noted from my pilot study that I needed
reassure them regarding confidentiality due to the topics being explored during
the interview. I therefore allowed a few minutes to converse, answering
questions about who I was and the study, before I embarked on tackling the main
core issues. Information regarding data protection and its destruction after the
study’s completion was reinforced for the same reasons. I collected simple
background data regarding their longevity in the business, job titles and types of
institutions experienced.
45
The four areas of known white-collar rule-breaking actions were then explored
so as to gather data in a uniform way regarding whether the respondents
believed the particular rule-breaking action had occurred, the prevalence of the
action, how many people were involved in committing the act, whether it would
be reported and, if so, to whom, what the typical consequences would be, and
what would promote or deter the action. Frequency and prevalence were not
fully capable of measurement due to lack of empirical data. Measurements used
for the responses were ‘most’, ‘some’, ‘few’, ‘almost never’ with regards to action
occurrence, and reporting colleagues for something was measured by ‘yes
always’, ‘yes sometimes’, ‘yes but rarely’, ‘no never’. I also sought to collect
frequency data for occurrence daily, weekly, monthly, annually. Additional types
of rule breaking not identified by the questionnaire were left as open-ended
questions at the end of the study. I also sought to solicit the participants’ views
as to whether people who broke rules in one area were more likely to break
rules in another. A copy of the questionnaire is included in appendix B.
CHAPTER VI
FINDINGS AND DISCUSSION
The presentation of this chapter shall broadly follow the specific research
questions for the research as set out at page 35, it also follows the structure of
the questionnaire posed to bankers and seeks to apply SAT under the
conventional headings.
46
The moral context of investment banking
The study provided anecdotal insight from a group of very experienced bankers.
16 of the 18 had worked within the industry since the first rules relating to
securities and investments were implemented in 1986 and provided valuable
observation of the evolution of their environment and it’s morality. See Table 1
in Appendix C for the data collected.
In many instances particularly in relation to illegitimate rate fixing and
mismarking of profit and loss responses questioned whether these acts were
rule-breaking at all. This is important in the context of considering the norms
created as the first proposition of SAT is to consider what is crime, SAT views
crime as moral actions, (Wikström 2010) if, as bankers reported they do not
believe that they are committing a crime, then their moral norm will be that it is
acceptable behaviour. Therefore where the rules are unclear moral levels are
unguided as to what is the right and wrong way to act. Some comments
demonstrating this are below.
“it’s difficult to define ‘illegitimate’ as the subject term often has a value judgment
which you decide whether its breaking the law or not ….”
“The problem is the ambiguity, sometimes it’s hard to know you’re breaking the
rules when you’re marking a volatile position …. You just find your own gut instinct’
… regarding rule-breaking “there won’t be a single trader of my era who hasn’t
done it…”
“the trouble is, none of the activities you’re mentioning used to be illegal… so it’s
hard for many old school to apply the new regime ..”
47
“many don’t see these actions (illegitimate rate fixing & mismarking) as wrong, it’s
just doing Bob a favor”.
Applying SAT to environments where opinions such as these are held is useful
because analysing crime as moral action doesn’t imply a moralistic approach, or
for an acceptance or rejection of the rule of law. To view crime as actions that
break rules doesn’t necessarily need laws, when you are considering crime as
moral actions it applies to all kinds of actions and equates them to rule breaking
or abidance, and not why they do an act but why they break the rules,
(Wikström, 2011), this was easier to explore as a concept during the interaction
with my bankers.
Many of the bankers stressed that there were compliance controls and training
regarding the correct procedures, but failed to relate this to their own moral
personal setting and thus appeared disconnected from the moral context. An
example illustrating this was provided by a trader regarding the contrast
experienced between a US and Japanese Bank. “I had been allowed to have large
positions at X and I was always trusted to operate my positions safely and
efficiently, the US were also flexible about my time keeping and how I chose to
operate. When I went to the Japanese Bank, I came in one morning to find ‘them’
huddled around my desk, they’d reviewed my book and sold half of my positions
because they were worried by it .. this cost [us] a fortune and I was really cross as if
they’d told me what their policy was regarding size of positions or asked me about
what I had, I would have been able to explain, what I viewed as safe and what they
48
viewed as safe were two different things and I transferred my experience from the
US who perhaps were a little more flexible..’
Does rule-breaking occur and is there an application of SAT
Illegitimate Rate Fixing
The first core issue researched related to illegitimate rate fixing by bankers. The
financial services of all the institutions of the groups studied involve transactions
with other institutions or private individuals where the offer rates of
commodities and products must be fixed. One of the most common forms of
rate used is the LIBOR (London Inter Bank Offered Rate). This is the average
interest rate used by the banks when they lend each other money. It is used to
price hundreds of trillions of dollars worth of financial instruments, from high
yield corporate debt to student loans. Banks often discuss the appropriate level
at which to fix the rate and others take the lead from the central core market
lenders. In 2009 it emerged that between 2005 and 2008 a group of major banks
had been manipulating the rate to show intentionally lower interest rates than
they were actually paying. They did this for two reasons, either to appear more
financially sound during the financial crisis, or to fix rates up and down in order
to profit from other trades (in derivatives) that were being negotiated inside the
bank resulting in substantial profits (Business Times, 12.4.13).
Acting as a group to protect the reputation and solvency of the corporation, is
akin to oligopoly and suggests conspiratorial knowledge within the management
involving collusion with other external business competitors. This process is
consistent with the way that setting a moral norm can create a criminogenic
49
environment, because there is tolerance to rule breaking activity which sets the
tone of acceptance for rule breaking, eg parking on a double yellow line because
everyone is doing it and you know the management wont clamp you in the car
park and thus rule breaking becomes acceptable, and a gateway of compatibility
for people’s personal criminal impulses become viable actions. Such moral
contexts are harmful because ‘they present opportunities and frictions which
may tempt or provoke people with particular desires, commitments or
sensitivities’ (Wikström 2006).
The second suggestion indicates personal goal driven motivation, where the
moral norm is established within an institution that rule-breaking is morally
acceptable, the behaviour of those within that environment becomes susceptible
to acting in response to a motivation or temptation to commit other types of
rule-breaking due to a correspondence between the two (Wikström 2011). In
this case the mechanism of SAT and the perception-choice process does not
come into play due to the correlation of the two settings, both being the norm to
break the rule, the action alternative doesn’t arise (i.e. that the behaviour is
acceptable to them) and the moral norms of the setting are compatible.
Commentators on this behaviour believe that this second allegation where
bankers act out of greed and self interest rather than for the interests of the
institution (even though illegal) is worse than the former because ‘it speaks to
the moral compass, or total lack thereof, of the world’s financial professionals,
demonstrating a “rotten heart” ’ (Mathews 2012).
50
The definition of illegitimate rate fixing is set out at page 42. All of my
participants immediately referred to LIBOR and discussed trading activities
around that subject without any ambiguity regarding the issue. The perceptions
recorded in relation to illegitimate rate fixing are shown in Table 2a: at Appendix
3.
When asked whether people illegitimately fixed the rates, the participants were
split in their opinions between ‘yes’ and being unsure. When the uncertainty
was explored it became apparent that the ambiguity arose due to the fact that
they believed individuals had been following the policy or instruction of
management and had either not been certain of the rules or were complicit in the
rule-breaking. We know that individuals can adapt to the morality of their
surroundings by justifying themselves or because they are being praised for
their actions; these responses would appear to support this proposition
(Wikström and Treiber 2007).
However, the LIBOR situation within Barclays is a demonstration of how the
mechanisms of SAT in relation to a personal moral norm and the process of
applying choice can work in considering crime as an action alternative. From as
early as 2005 there was evidence that Barclays had been manipulating the dollar
LIBOR and Euribor (the eurozone’s equivalent) at the request of its derivatives
traders and other banks (FSA Report 2012). One Barclays trader using a
Bloomberg International Communications System capable of internal and
external monitoring had commented to another trader in relation to a three-
51
month dollar deal ‘duuuude…. What’s up with ur guys 34.5 3m fix … tell him to get
it up!’ (BBC Business, 6,2. 13). On 28th November 2007 a senior submitter (rate
approver) at Barclays wrote in an internal email that ‘LIBORS are not reflecting
the true cost of money’ and in December 2007 a Barclays compliance officer
contacted the UK banking lobby group British Bankers’ Association (BBA) and
the FSA and described ‘problematic actions’ by other banks, saying that they
‘appeared to be understating their LIBOR submissions’. We know that
essentially people are ‘rule guided creatures’ (Wikström 2010). In the Barclays
case the issue of control (self) or deterrent had probably not kicked in due to the
scenario lacking deterrents or controls, thus lending support for the proposition
that the moral context is stronger than the issue of self-control. A participant
with a weaker constitution will see crime as a legitimate alternative given their
moral character is under-developed and they may fall foul to the pressures of
their environment (Wikström 2010). Weak morality and a low level of self-
control are strong predictors of crime propensity; however weak morality is the
stronger indicator of the two (Wikström and Svensson 2010).
In contrast, a different Barclays compliance employee contacted the FSA in
December, expressing concern about the LIBOR rates being submitted by other
banks but failing to advise the FSA that Barclay’s own submissions were
incorrect, instead saying that ‘they were within a reasonable range’ (BBC
Business, 6.2.13). The fact that the regulatory authorities were contacted tends
to support the idea that the individual knew that the actions were wrong;
however, in deliberating the perception choice process he chose not to report the
wrong-doing within his own institution.
52
Presenting rules as moral actions guides people as to the right and wrong way to
act thus developing their personal morals. Removing ambiguity prevents
justification or ignorance and that allow people to act on their motivations.
Having clear policy and guidance regarding the acts as moral norms in this
situation would in my opinion assist in the moral context because some of the
participants were influenced in their actions by reason of the ambiguity in the
regulations and laws guiding the activity, however, when the issue was explored
they knew it was morally wrong.
Following on from knowledge of the existence of the action was the issue of
whether the action would be reported. Using a collective-efficacy framed
question is a good measure when considering the moral context of an
environment (Wikström, Trieber, Oberwittler and Hardy, 2012). Although only a
limited replication can be made in my study due to limitations with the extent of
the length and details of the questionnaire, the responses received regarding
reporting, trust in authority and intervention give an indication of social
cohesion and levels of informal social control of the environment. My research
results indicate poor levels of informal social control given that the majority
indicated that illegitimate rate fixing would never be reported. One participant
explained that the reason for this was ‘it’s often hard to see and the ambiguity
leads to people fearing reporting it’.
I asked my sample group to consider to whom a report would be made if the
conduct was reported. It was of note that many of my participants were unable
53
to provide any suggestion, maintaining that it would not be reported. This
demonstrates the strength of the context within which this response was made.
The tally of responses regarding the reporting structure and sanction are set out
within 2b at Annex C.
However, from the results, the consequences for those involved in the activity
were very clear. Of similar interest was the observation that those who knew of
the offence but failed to report knew they were equally complicit and yet still
were not able to report the action. All accepted that the perpetrators should be
dismissed which leads to the possible interpretation that they were aware that
the behaviour was wrong.
Many agreed that the factors driving the actions were monetary. An actuarial
assessment of bonus receipt following the mismarking scandal is an example
where individuals were set to make between $2-3.5 million from their actions
dishonest actions (Times 16.9.12) and report of the Financial Services Authority
(FSA 2012) which regulates the UK and the Commodity Futures Trading
Commission (CFTC 2012) which regulates the USA, following the Barclays
investigation criticise the profit-bonus culture. Economists estimated that the
misconduct could have netted an average of $2.9 to $3.6 million in extra bonuses
for each individual responsible (Smith 2013).
It was considered that the measures which would deter the action most
effectively were sanctions. Although one participant commented ‘I would stress
{the number of examples are] going down due to the consequences of what’s
54
happening with investigation/sanctions’, many felt that the fining institutions
held little fear for the individual as the fines had no impact upon those who
perpetrated the action although one did feel that fining the company was
justified because ‘management were often complicit’. The comments of Bob
Diamond the ex-Chief Executive of Barclays appear to contradict these views,
when, in his letter to the staff of Barclays written upon his resignation, the day
before he gave evidence to the Parliamentary Select Committee on 4th July 2012,
he warned ‘we have to take appropriate action against those involved ... our
internal disciplinary process, which began some time ago, will be completed swiftly
… we are being thorough and robust while also ensuring we undertake due process.
We are reviewing those directly responsible and those in supervisory roles. We
have the full range of tools at our disposal, from clawing back compensation to
asking people to leave the bank.’ The announcement by Reuters that criminal
charges in the US and Europe are imminent appear to be shifting this perception.
Of particular interest was within my study was one banker’s reflection that
‘people’s “moral compass” are set by those around them. It continues to shift. There
is a massive emphasis on profit’. Research has shown that moral norms are
developed by processes of moral education which attach to emotions through
processes of instruction, trial and error, and observations of reactions and
sanctioning of others (Wikström 2011). A participant gave this explanation to
demonstrate the application of this concept of SAT “my boss called me in and told
me I was letting the team down by failing to put £250 per month claim for taxi
expenses. He told me to tip the driver and get a book of receipts if necessary, but
putting in £60 was unacceptable and made them look bad”. Another example was
55
where a banker had been made to pay for an excessive restaurant receipt he’d
sought to reclaim, he advised `’he’d tried it on but he wouldn’t do that again …”.
In December 2013 the European Union fined eight Banks a total of $2.3 billion
for their part in the LIBOR scandal. This will no doubt focus the minds of all
those in the industry on the consideration that there is no ambiguity in this
behaviour and that it is both legally and morally wrong to do so or assist in it.
Criticisms are frequently made that white-collar crime offences are not
adequately investigated, prosecuted and sanctioned (Pontell, Rosoff, and
Peterson 2008; Reiman 1995).
In my study of particular interest was one banker’s comments that ‘the problem
with prosecuting people for trading behaviour is that people don’t understand the
wrongdoing, it becomes unclear and people are not convicted so the authorities
fear bringing the cases’. Given the FCA’s dealing in December 2013 with David
Hobbs this could signal greater external controls and deterrents applying the
mechanism of SAT. Criticism historically have been made of organisations who
fail to cooperate and seek to protect individuals and are defensive as to their
practices (Snider 1997). We could be about to see a shift in the use of the
‘corporate veil’ as the priorities of corporations, who realise that they must give
respect to the regulators and may be held personally accountable for actions
which they’d previously distanced themselves from.
56
Mismarking
The second core question explored during the research was in relation to the
mismarking of a trading account. Traders whose business it is to buy and sell the
various financial products on behalf of the bank and its clients keep records of
their daily activities. These are commonly referred to as their ‘books’. These are
required by both internal and external compliance rules in order to provide
valuations for the items that traders have in their books. The general common
principle used is that a trader must price the products within their book by
giving them a ‘mark to market’. This means that they put a price on what they
have, based on what it would cost to exit the market, either by buying something
to level a position that they have promised or selling something that they have
bought. A common way that rules are broken by traders is that they misprice
their portfolio. Sometimes they do this so as to make losses look smaller, or they
inflate the price, thus masking the true picture. Some policies require them to
carry out the valuation process daily, some weekly, or monthly; historically this
used to be quarterly or yearly. Usually traders would place valuations by
indicating a ‘spread’, i.e. a range within which the price is estimated. This is done
because, like the value of any property, the price often depends upon the
condition of the market at the time you wish to sell, the size of the position that
you wish to buy or hold, and the time within which you are looking to execute
the process.
The offence is significant in a white-collar crime setting because it impinges upon
so many fundamental aspects of global business. It relates to providing profits to
57
the company and individuals, maintaining the trust and confidence of
shareholders, investors and clients in order to mitigate losses, and hiding the
negligent actions and instructions of individuals, management or clients during
their operation of the business.
I sought the opinion of my participants as to whether mismarking occurred in
their work environment. The definition used can be found at page 4. The data
gathered is not presented as a reliable indicator of general patterns and
frequency due to the limitations with the data set; however it is presented as
anecdotal observations of my sample group. Detailed tally results can be seen at
table 3a within appendix C.
From the results presented within appendix C table 3a it is apparent that the
majority believed that traders mismarked their books. Some respondents were
unsure due to the nature of their role, i.e. a sales person would be reliant upon
the trader and be less aware of the true trading position of a product. Of those
interviewed all who had been employed as traders believed that most people
had mismarked their book. One participant stated, ‘of my era there won’t have
been a single trader who hasn’t done it’.
Research has shown that people are motivated to act for many different reasons.
SAT considers what moves people to commit crime and how the individual
experiences and how environmental features interact in the process.(Wikström
2011). The action of mismarking a trader’s book appears to fit with many
concepts of the theory. For example, when the causation of the actions were
58
explored and the participants began to explain the different scenarios that they
had encountered, in some cases both the traders moral context and that of their
environment would correspond, in which case according to SAT crime would not
arise. In other scenarios there would be frictions in both respects, either
personally or environmentally, making the perception choice process critical.
For example most traders are required to report their positions to management
for four reasons: in order to account for the profit or loss in the area of business
within which they are situated, in order to evaluate the company’s trading
position; to consider what the risks of the business are, given the size and
positions of traders’ books; and to evaluate whether the trader should be paid a
personal bonus. The banking industry works on a notorious system of annual
bonuses. The simple basis for the bonus is the profit and level of success of the
business. Therefore there may be both ‘intrinsic’ and ‘extrinsic’ issues to manage
within the moral context. Individuals were described by participants as being
motivated by personal greed, self-interest and personality traits, being driven to
get their bonus regardless of the true position, or trying hide the true position in
order to avoid being fired by the management, or to safeguard their ego and
avoid shame by revealing negative equity and possible incompetence. In their
reports this was combined with a system of poor controls, little supervision to
offer guidance on proper conduct, and limited sanctions if traders were caught,
and thus there was little deterrent effect. The action process for those motivated
was completed with little weight of intervention in the perception choice
process. Comments demonstrating this from my sample group were ‘failing to
properly supervise someone, who is under pressure to make their bonus just allows
59
mischief’’. … ‘The problem is when there’s an ambiguity that people can exploit,
sometimes its easy to question whether you’re actually breaking the rules when
you’re marking a volatile position. People are not clear about the proper process.
You are not supervised and it’s done so easily.’ …’The Society General guy knew the
weakness of the institution and exploited them. They had a delay between London
and Paris, the traders being in London and the back office and compliance in Paris.
He knew there were communication and control issues and he exploited them. Yes,
they found out, but he probably thought his position would rectify before they did
and he’d stay ahead. It didn’t’. … ’The pressure is huge to mismark to save the face
of a client or another who is losing or will lose money if you mark to market’. ‘They
decide to take a risk, they weigh it up and there’s no personal downside to them if
they’re caught’.
The mechanism of SAT can be tested against the participants comments where
the moral norms of the person conflict with the environmental norms. The
sample group explained that even where a person has no intention of breaking
the rules, the environment can cause both personal stress and pressure, affecting
the judgment of people making a conscious decision as to how they should act.
They also spoke of peer pressure from those around them in the team who
would be anxious that a poor performance from one individual would affect the
prospects of the group. A comment demonstrating this is that ‘People start off
with a good mentality but a few bad apples can rot the barrel.’… ‘You can be a good
kid but that is quickly eroded away if the guy above you is telling you to keep doing
the wrong thing, especially if you look above him and see the next guy doing the
same. Two years into the process they will all be as bad as each other. If the guy at
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the top is ruthless, clear and conscientious regarding behaviour, then that filters
down for sure’. This demonstrates that within the perception choice process,
decisions can become reasoned (via judgment) or automated (habit). It also
accords with the hypothesis that moral education can take place through the
process of instruction, trial, error and the observation of reactions and
sanctioning of others (Wikström 2011). It is also consistent with the
explanation that people’s moral norms can be impacted by environmental stress
impacting cognitive behaviour and ‘executive functions’, rendering them
vulnerable to criminogenic settings and the development of criminal propensity
(Wikström and Treiber, 2007). The functions highlighted by some of my
research participants were ‘stress, anxiety, fear, exhaustion, intoxication’; all of
these factors are consistent with the concepts affecting ‘control’ within the
definition of SAT.
The observations that such practices were rarely reported indicate the systemic
failures and lack of control in many investment banks. A significant illustration
of this is the ‘London Whale’ scandal involving JP Morgan, which began to
emerge in the summer of 2012 but which did not become clear until the summer
of 2013, coincidentally just as I was embedded in the City to conduct my face-to-
face interviews. Bruno Iksil was employed by JP Morgan as a credit derivatives
trader; he became so famous for the size of his trades that the industry
nicknamed him the ‘London Whale’. He mismarked his book to hide the true
value of his positions and the extent of the losses he was incurring. His actions
led to the loss of $6.2 billion and resulted, after protracted investigations by the
US and UK Authorities, in an aggregate fine of $920 million from three US
61
regulators and one UK (BBC News, 19.9.13). It also led to the arrest and
indictment of two employees from the US office, Iksil’s 49 year old boss and his
35 year old assistant, who were indicted by the US Attorney for ‘engaging in a
scheme to falsify securities’ and who face a possible 20 years in jail. Iksil secured
an arrangement to cooperate with the prosecuting authorities (Bloomberg
Business Week, 14.8.13). However, before that agreement was reached, news
agencies were leaking reports that the management of JP Morgan were not only
aware of the problems and had failed to act and control the position as the rules
prescribed, but were complicit in hiding the losses and avoiding cooperation
with the authorities when concerns were raised. Iksil allegedly had several
emails in which he tells his supervisors that ‘the losses are getting horrific and he
can’t keep hiding it anymore’ (BBC News, 14.8.13). Comments from Jamie Dimon,
the Chief Executive Office, who controversially also held the position of
Chairman, were that it was ‘a tempest in a teapot’ (BBC News, 12.7.1 12). The
FSA also commented that they had registered concerns with JP Morgan with
regards to their practices and risk-taking, but that the firm was not ‘open and co-
operative’ and they (the FSA) were ‘deliberately misled’ during their enquiries in
2012 (BBC News, 19.9. 13). Dimon subsequently admitted to substantial
regulatory breaches and systemic failures within JP Morgan’s management,
leading to a number of individuals being fired, some with civil suits for the return
of compensations paid during the indictment period. But despite this JP Morgan
still made a profit of $21.3 billion in 2012 and reports accuse the firm of ‘failing
to enact proper controls, supervise workers, escalate concerns and share
information internally’ (FSA Report 2012).
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The fact that the industry has been driven by a system of profit-driven goals,
thus eroding the concepts of moral norms, could arguably have created a group
of ‘systemic factors’ stimulating rule-breaking activity. Perceptions of
mismarking within investment banks can be reviewed at table 3b at appendix C.
Insider Trading
The third core area explored with my sample group was that of insider trading.
Of all the issues discussed this produced the most rapid and clearest responses
regarding the action. The responses are recorded in Table 4a at appendix C and
a definition of the action is explained at page 42.
All bar one of those interviewed believed that insider trading was a crime which
still occurred frequently within investment banks. The responses regarding
frequency were split between ‘frequently’ and ‘opportunistically’. The reporting
of the crime produced a range of opinion covering all propositions ranging from
that it would ‘always be reported’ if discovered, ‘sometimes be reported’, ‘rarely
be reported’, to ‘never be reported’. This suggests that in relation to this action
the issue of controls could be key. Controls within SAT can be social or
situational to the person or environment. An example of this was demonstrated
by a participant who had been a ‘whistle blower’ in relation to a trader who was
guilty of insider dealing. The participant recounted the incident of a trader who
was trading securities within his account (insider trading), and who requested a
junior fellow trader to process the trades arranging the transfer of funds to
reconcile the business. The trader who was relating the incident noticed that the
trade had been transacted on a bank holiday, but the reconciliation had been
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made the following working day with funds arranged for the same day, in the
ordinary way a trade would be processed. Having checked the price, this
appeared less than the market rate (illegal market abuse), the details of the
account making the payment was linked to the trader. The participant described
feeling ‘incensed at the wrong doing, corruption of a junior who was innocently
being implicated and the clear breach of trust and dishonesty being demonstrated
by the individual, placing everyone at risk…. It was just morally wrong … despite
going against the grain to report a colleague I couldn’t stand by and let it
happen……. He was suspended, investigated and fired, but not prosecuted and it
was not publicised, although those internally were aware’. This response could
also support the criticisms made in studies of white-collar crime in relation to
secrecy on the part of corporations in the interests of self preservation and the
weak sanction for non-compliance with the rules of regulatory bodies, resulting
in low prosecution rates (Snider 2003; Pontell et al. 2008).
The greatest motivator was purely greed and self-interest given the potentially
huge benefit made available through the deception. Some participants
commented ‘part of the problem is that the practice wasn’t illegal twenty years
ago, was positively encouraged and most people saw it as a commercial perk’. It is
now ingrained within all institutions that insider trading is absolutely forbidden,
and there is little ambiguity regarding this practice. Despite the fact that many
had been trading when it was permitted, there was clarity that it was
discouraged and thus the moral norm in respect of this was clear. The impact of
this doctrine was such that it was capable of resulting in an individual reporting
a colleague for the action, given the level of friction and intolerance experienced
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by them. This is important for the development of future compliance and
controls within investment banking. The causal mechanism of SAT involves
processes of social and self-selection by placing certain kinds of people in certain
kinds of settings (creating particular kinds of interactions). Thus education and
clear statements as to where the boundaries are and possible sanctions create
interventions that are vital in managing the risk of offending.
All participants stated that greater deterrents were necessary to prevent insider
trading and that poor controls and opportunism created an unacceptable lacuna.
Misuse of company privileges
The final issue explored with my participants was that of misuse of company
privileges. A simple outline of this practice is ‘using the privileges afforded by
reason of employment for non-work related expenses and obtaining benefits by
deception in breach or excess of company policy’. The majority felt that most had
acted in this way but it was now subjected to such policy and control by
management that few would risk breaking the rules. The example of Barclays
bankers running up a £50,000 bill at an expensive London restaurant was given
during an interview. This attracted negative media attention which caused
reputational damage to the company and resulted in stricter controls to the
industry generally as a result.
This restaurant bill story brought such negative attention to bankers and how
they behave that it had impact on both the social and situational dynamics of the
moral norms. Bankers were embarrassed at the excessive opulence and
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indifference towards the expense incurred to the employer. This brought wide
condemnation of their actions, which caused ‘shame’ about the profession in
general, with bankers portrayed in the media as over-paid, greedy and indulgent.
Causal process and influencing factors
SAT states that all crimes are situational and thus the causes of the causes are a
convergence of personal causes of crime with the social causes of crime. We can
see from the research and the discussion of the actions in relation to bankers
that there is support for this hypothesis. From the discussion above we can
observe that not all bankers placed in the same situation break the rules. In
many circumstances the simple method of crime causation can be explained
within banking using P x E C [Wikström 2012, figure 1.3.1] (see page 12
for detailed description) The motivations initiating the action within this context
have been widely discussed within the media, parliamentary reviews and my
own research findings as been greed, profit and self-interest. Those concepts can
be applied within the context of SAT internally (personally) and externally
(environmentally) and the moral filter which individual bankers apply in the
interaction between the moral rules and the norms of the settings can be seen
from the discussion above to present action alternatives as per the theory. The
issue of controls both self-control and deterrents giving causal deliberation to
whether one should act or not. There system of control and the acts of deterrent
have been discussed within this study, the role of the FSA/FCA in particular has
in my opinion been key in the factors impacting the situational process for
bankers considering their action alternatives. When designing the research
method I sought to include participants within the sample group from three
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different types of Institution, public banks, private companies and boutique
hedge funds. The aim was to analyse the responses to see if there were any
obvious variations between the groups. There was agreement regarding all
groups of the motivation for rule-breaking. But commenting beyond this with
regards to whether there is a variation in the moral context of those institutions
would be too remote. They all agreed that the role of management was a key
factor in the strength of direction of the moral filter. A participant openly shared
a management practice of his dealing room to hold morning meetings in a small
office in order to observe the personal characteristics of his traders and evaluate
the extent of any cognitive impairment with drink, drugs, exhaustion, emotion.
He also considered it good practice to be aware of the stability of their personal
lives in order to consider the ‘extrinsic’ issues that may affect their focused
performance. This demonstrates a scenario based model for the application of
the mechanism of SAT considering motivations, an impact to moral norm, and
self-control/deterrents.
Limitations of the study
As with any qualitative research, this study has limitations. The lack of a large
dataset providing quantitative data means that fully testing the hypothesis is not
possible. However using key informants to report upon their settings provides a
valuable insight into an environment in which academic research has very little
exposure, and the study has been approached as a ‘scoping study’. The size and
selection of the sample group is vulnerable to some extent because of not being
random, fully representative of popular interest, and reliable in the responses
provided. However, the responses provided and their uniformity can offer some
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contribution when considering the concept of SAT. Snowball sampling risks
shaping the entire sample, however the introduction of three groups of
institutions does provide some safeguards against such contamination. The
purpose of the study was to consider the mechanisms and explore the moral
context of these environments and to this extent the limitations outlined do not
affect this evaluation.
CHAPTER VII
CONCLUSIONS
Conclusions of the study
This research set out to study the morality of bankers within the environment of
investment banking. It also aimed to consider whether there were links between
rule-breaking and the moral context of those environments. In evaluating these
two areas of research I considered the applicability of the framework and
mechanisms of Situational Action Theory (SAT). The study sought to fill a gap in
the research by seeking to apply SAT to a white-collar crime environment. In
exploring this concept I also needed to investigate whether criminal acts
occurred within these settings, and the nature and extent of that behaviour.
I approached the study using SAT’s notion of ‘crimes being moral actions’
(Wikström 2010) and the definition of morality within the theory of SAT ‘as an
action considering whether it’s right or wrong to do something’ (Wikström
2014). The study was ‘explorative’, using bankers as key informants of their
environment. The findings were gathered using one-to-one interviews, with
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participants being selected via a key targeted informant who facilitated with
respondent-led snowball sampling, repeated to produce successive waves.
The participants all emanated from investment banking backgrounds which had
involved trading, or were closely linked to trading, and were asked to comment
as ‘observers’ of that environment to safeguard disclosure. The ethical
preparations and considerations can be reviewed fully on page 36. The sample
group had been engaged in trading-related activity in three different types of
institutions: public banks, private equity companies and boutique hedge funds.
A definition and explanation of the businesses can be found on page 40. A
sample was chosen from a range of institutions to examine whether there were
any variables in the findings for different settings. There is insufficient reliable
data to make any safe assumptions regarding variations in the moral contexts of
the different institutions.
It was difficult to access the group and obtain their trust and cooperation. A
participation information sheet and a detailed data and confidentiality
protection clause were drafted to assist with informing the participants about
the nature and purpose of the study and the use and protection of information,
and to secure their trust and agreement to participate; this is in Appendix A.
I interviewed my bankers face-to-face using a semi-structured questionnaire
designed around the ‘collective efficacy’ model which was known to be a good
method for measuring the moral context of an environment, and is used by
Wikström et al. in the PADS study (Wikström et al. 2012). I adapted my design,
69
contrasting the neighbourhood settings of the PADS study to the dealing rooms
of investment banks, with rule-breaking white-collar criminal behaviour in the
place of anti-social neighbourhood behaviour. The model worked well in the
context of my study, as the participants related easily to the core issues and
commented upon the ‘relationships’ with colleagues and the environment.
The questionnaire gathered limited personal background detail, as my focus was
primarily on the environmental setting. There were four core areas of ‘actions’
considered: illegitimate rate fixing, mismarking profit and loss, insider trading,
and misuse of company privileges. Discussion regarding these offences and their
definition can be found respectively on pages 48, 56, 62 and 64. The
questionnaire design and method is reviewed on page 41 and the questionnaire
is in Annex B.
The basic proposition as per SAT using my key informants as observers was to
consider within their settings, as guided by the questionnaire: a) what crime is,
b) what moved people to committing acts of crime, and c) how individual
characteristics and experiences and environmental features interact in this
process (Wikström 2004).
The present study establishes support for the application of the framework and
mechanisms of SAT to white-collar rule-breaking activity in investment banking.
70
Criminogenic Opportunity
The sample group reported that all of the rule-breaking activity identified as
white-collar crime activities in the core areas researched had occurred within
environments that they had been in. Illegitimate rate fixing and mismarking
were sometimes hard to describe as criminal behaviour due to ambiguity in
relation to the conduct and the law; however all participants were able to discuss
these concepts within the context of moral actions as defined by SAT more easily
than of breaking the law when discussing how they occurred.
The findings established that personal moral rules are an important starting
point in the commission of acts, as per the theory of SAT. There was support for
Wikström’s proposition that ‘people are essentially rule guided creatures but can
become vulnerable to their criminogenic settings’ (Wikström 2010). The moral
norms of an environment are developed to the extent by which they are
encouraged or discouraged, and the findings support this contention.
Perception-choice process
The mechanisms of the situational process were evident from responses from
bankers regarding how the decision-making led to rule-breaking actions (see
page 13). Motivation to take part in such behaviour was high in their
environment, both in terms of temptations and provocations, largely due to the
monetary goals originating in either the individual or the environment, initiating
their actions. The findings support SAT’s hypothesis that where there is
compatibility between the moral rules and norms of their environment action
alternatives did not arise in relation to rule breaking or abidance. There was
71
evidence of there being ‘frictions’ resulting in the consideration of action
alternatives such conflicts between bankers personal morals and instructions of
management or company policy and the evaluation of situational factors of
control when the process of whether to comply or break the rules. This is
demonstrated by the fact that not everyone breaks the rules, and cases discussed
of ‘whistle-blowers’.
Controls
Control, within the meaning of SAT was evident from the findings and discussion.
Participants explained self-control and issues impacting this such as financial
temptations, provocations, difficulties with their cognitive functioning and moral
reasoning due to pressures of their environment. They also discussed deterrents
or lack of them evident within the work place surroundings impacting upon
choices made. The findings indicate that the environment is capable of affecting
the executive functioning and cognitive abilities participants reported the
presence of stress, anxiety, fear, exhaustion, and intoxication. See page 65 for
detail. Evidence of crimogenic environments affecting propensity and crime as
an alternative was also evident, see page 58-59. These are apparent from both
the findings and government and regulatory reports seeking to understand
causation and effect better, deterrent and sanctioning practices following the
recent banking crisis.
The process linking the causes and the causes of the causes
There has been an emergence of white-collar rule-breaking activity within
investment banking which has damaged the institutions, the individual bankers,
72
the regulators and the government because of a loss of trust and confidence on
the part of the public. The principles of SAT can be used to link the causes and
the causes of the causes (as described on page 5 & 19) evidence supporting this
is set out at page 64-65 within the findings and discussion. Of interest is the
process of social and self-selection, which places certain kinds of people in
certain kinds of settings (creating particular kinds of interactions) (Wikström
2011). Investment banking is vulnerable to this concept given the moral context
of the environment.
Policy implications
The UK is experiencing a paradigm shift in the way that rule-breaking in
investment banking is internally managed and externally controlled. This is
because of the recent banking scandals and crisis, the various all party group
enquiries and government reshaping of the executive management of the
banking industry. The planned introduction of criminal statutory legislation to
hold those managing and directing individuals accountable for their rule-
breaking actions will cause a review of both social and situational dynamics in
the moral context. The policy and actions demonstrated by the new Financial
Control Authority in the last 6 months has sent out a warning of zero tolerance
and a clear message regarding integrity with the example of the striking-off of a
banker who was cleared of rule-breaking but was guilty of lying see page 33-34
for the detail.
The separation of powers in the executive functions of the Financial Policy
Committee, Prudential Regulatory Authority and Financial Control Authority
73
signals that clearer rules and definitions of moral norms are expected, and the
authorities would be wise to consider the interplay between theory and social
science as an education factor. The director of the FCA has already
acknowledged that problems lie not in the creation or enforcement of rules but
in the flaws of the business and in the culture of those who operate it. Hence we
will see greater emphasis on the area of human resources management both in
recruitment and in the ongoing professional development of core integrity and
morality, more education in humanities rather than mathematics in the banking
industry, and, rather than solely using market measurement matrixes to reveal
flaws and cases of rule-breaker, there will be a greater focus on monitoring.
Future research
This research was limited to a scoping study focusing on the moral context of the
environment. Further research on the sample group to collect more personal
data would assist with testing the theory more fully. Having access to the
regulators’ data regarding reporting and enforcement would also provide clearer
patterns and results regarding the frequency or prevalence of rule-breaking in
the City.
Consideration could be given to the design of a survey for bankers to complete
similar to those in prison studies measuring quality of prisoners lives (MQPL)
which provide an insight into how the system is perceived by those within it on a
number of levels. Instead of measuring the quality of prison life, it would
measure the moral norms within the banking environment and the extent to
which rules are encouraged or discouraged. It could also explore the
74
relationship and supervision of management and how they interface with the
business, addressing the core issues of knowledge, competence, skill, care and
control.
I experienced fear from some participants and I also experienced aggression and
hostility from banking institutions aware of my study and research participants.
A future study which was confidential for the bankers to participate in but had
the support and compliance of sharing information from HR Departments would
also be an interesting future study. This may not be as unrealistic in the future
as it appears today given the comments of the FCA in addressing the culture of
organisations and the desire to change the business.
75
APPENDIX A
CONSENT FORM & PARTICIPATION INFO SHEET
Project title: Moral contexts and rule-breaking in investment banking: The
applicability of Situational Action Theory
Researchers: Rachel Spearing, Institute of Criminology, University of Cambridge,
Please tick the boxes if you agree with the following three statements.
YES
1. I have read and understood the Participant Information Sheet for the study (or have had it read out to me and have understood it), and have had chance to ask questions.
2. I understand that my participation is voluntary, that I do not have to
answer any of the researcher’s questions if I do not wish to, and that I
can withdraw at any time, without giving reasons, until 31st December 2013.
3. I agree to take part in the study, which means being interviewed by the researcher.
Please answer YES or NO to the following two statements by ticking the appropriate
box.
YES NO
4. I agree to our interviews being recorded.
5. I agree to let the researcher use quotes from our interviews and conversations, as long as this is done in such a way that I cannot be identified.
Name of participant:
Date:
76
Signature:
Name of researcher:
Date:
Signature:
Participant Information Sheet
The aim of the study
Is to learn more about the working environment in investment banks. Your
knowledge and experiences are very important for a complete and reliable picture of
what it’s like working in investment banking.
Who I am
I am a student of the Institute of Criminology at Cambridge University and am
undertaking a pilot study as part of my Masters degree. I am a qualified Barrister and
practice at the Independent Bar but none of my studies are funded by any organisation
and I am completely independent of grants, subsidy or 3rd party interest. I am
presently taking a sabbatical from my practice to undertake this further academic
study.
What I am researching
I am conducting research around the recent crimiological Situational Action Theory,
of Professor P O Wikstrom. As part of this research I am seeking to interview
professionals presently within or who have practiced within the banking industry.
How will I conduct this research
I will conduct a structured one to one interview lasting approximately 30-40 minutes,
asking a set of questions of the individual. They will be asking the individual to
comment upon their experiences of the banking industry and their environment. They
will be focused on the individual as an observer and not seeking to explore your own
personal experiences or conduct.
77
Do you have to answer the questions asked?
No. If you are unhappy discussing any issues I cover, please just advise me and i’ll
move on.
Confidentiality
The process is entirely confidential and does not seek to identify an individual who
participates or their present/former institution in any way. This document is a binding
confidentiality agreement.
Communication
All communications will be through a private telephone number or email and I will
not contact you during office hours, via an employers email or telephone number.
What will happen to the information
The information will be recorded and may be reproduced as part of an empirical
statistical study for my thesis work. This will be submitted in January 2014 and all
material held will be destroyed in July after the course is concluded.
I am happy to discuss any further questions prior to meeting I am happy to
communicate via phone +44 7887853852 or email [email protected]
78
APPENDIX B
BANKERS QUESTIONNAIRE
Institute of Criminology Mst Penology
Thesis Questionnaire
Moral contexts and rule-breaking in investment banking: The applicability of SAT
Intro
Aim of the Study: “the aim of this study is to learn more about the working
environment in investment banks. Your knowledge and experiences are very
important for a complete and reliable picture of what it’s like working in investment
banking.”
Consent re participation: sign the declaration.
Statement of Confidentiality: re-enforce the anonymity and data
protection/destruction.
General background Information on participant:
• How long have you worked in the banking industry; • What was/is your role/title; • What type of Institutions have you worked in: (public, private, boutique)
Illegitimate Rate Fixing
1. Do people illegitimately fix the offer rate of products/commodities
2. How many people within institutions act in this way? most (75%+); some (around 50%); few (<25%); almost none.
3. How often does this practice occur? Daily, Weekly, Monthly, Annually.
4. If a person discovered that a colleague was illegally fixing rates, would she/he report that colleague? Yes, always; yes, sometimes; yes, but rarely; no, never.
5. To whom? Head of Desk, Senior Management, Compliance, Police.
6. What would be the typical consequences.
7. What factors promote illegal rate fixing.
8. What factors deter.
Marking / Mis Marking Profit and Loss
79
1. Do people mis mark their books? Most, some, few, almost none
2. How often does this tend to happen? Daily, Weekly, Monthly, Annually.
3. If a person discovered that a colleague was mis marking their book, would she/he report that colleague? Yes, always; yes, sometimes; yes, but rarely; no, never
4. To whom? Head of Desk, Senior Management, Compliance, Police.
5. What would be the typical consequences?
6. What factors cause people to mis manage their book?
7. What would be a deterrent?
Insider Trading Activity
1. Does Insider Trading take place?
2. How often does this happen? Daily, Weekly, Monthly, Annually.
3. If a person discovered that a colleague was participating in such behaviour, would she/he report that colleague? Yes, always; yes, sometimes; yes, but rarely; no, never
4. To whom? Head of Desk, Senior Management, Compliance, Police
5. What would be the typical consequences?
6. What factors cause people to participate in such behaviour?
7. What would be a deterrent?
Misuse of company privileges
1. Do people misuse company privileges? most (75%+); some (around 50%); few (<25%); almost none.
2. How often do people tend to abuse privileges? Daily, Weekly, Monthly, Annually.
3. What types of misuse happens?
4. If a person discovered that a colleague was participating in such behaviour, would she/he report that colleague? Yes, always; yes, sometimes; yes, but rarely; no, never
5. What would the typical consequences be?
80
6. What would an effective deterrent be? 7. Are the people who behave like this more or less likely to break other
rules?
8. Why do you think this is?
81
APPENDIX C
Tables of questionnaire results
Table 1: Participants and their general backgrounds
How long in the Industry Role / Job Title Type of Institution 18 years Fixed Income Trading
and Management Public Bank
20 years Commodity Trading / Management
Public Bank and Boutique
30 years Structured Finance, Research and Management
Public Banks
20 years Trading/Sales/ Management
Public Bank
30 years Oil and Gas Credit / Exec Management
Public Bank, Private, Boutique
30 years Credit Trading / Exec Management
Public Bank
30 years * Asset Management / Trading
Public Bank
22 years Asset Management and Trading
Public Bank
31 years Trading / Broking Public Bank, Private, Boutique
31 years Credit / Sales / Trading Public Bank and Boutique
25 years Trading / Broking Public Bank and Boutique
35 years Bond Trading Public Bank and Boutique
20 years * Credit Markets / Sales Public Bank 25 years Fixed Income Trading /
Management Public Bank, Boutique
18 years Sales / Trading Public Bank 7 years Sales / Trading Private 15 years Sales / Trading Private 22 years Origination/ Syndication
and Management Public Bank
2 females (* ) and 16 males
82
Table 2a: Perceptions of Illegitimate Rate Fixing within Investment Banking. Do people illegitimately fix rates?
How many: most=75%; some=50%; few=25%; none=0%
How often: Daily Weekly Monthly Annually
If discovered would it be reported: yes always; yes sometimes; yes but rarely; no never
Yes: IIIIIIIIII No: I Not sure: IIIIIII
Most: IIIIIIIIIII Some: IIII Few: III None:
D:II W: M: A: Hard to say: IIIIIIIIIIIII
A: II S:II R: II N: IIIIIIII
In this table tally marks were used to indicate the number of participants who gave each answer. Table 2b: The process of not reporting, consequences of action and factors which
promote and deter
To whom?
Desk/ Man Management Compliance Police
Possible consequences
Factor promoting the behaviour
Deterrent factors
Desk: III Man: II Compl: I Police: No answer: IIIIIIIIIIII
If don’t report complicit – fired: IIIIIIIIIIIIIIIIII
Costs / p&l Monetary: IIIIIIIII Short term goal: IIII Fear: III Weakness: II
Clear rules / sanctions: IIIIII Self control: I Fear of getting caught: III Change structure of bonuses: III Being fired: III Encourage reporting:II
83
Table 3a: Participants responses about mismarking actions in investment
banking
Do people mismark? Most; some; few; none
How often? Daily; weekly; monthly; annually
If discovered would it be reported. Yes always(A); yes sometimes(S); yes rarely® ; no never (N)
Most: IIIIIIIIII Some: III Not sure: IIIII
Historically frequently: IIII Now rare: IIIIIII
A: II S: III R: IIIIIII N:
Table 3b: Perception of mismarking activity within investment banks
Who to report to? Colleague; Desk; Senior Management; Compliance; Police
Possible consequences
Factors causing behaviour
Factors deterring behaviour
Desk: II Man: III Compliance: I Police:
Depends :II Fired: II
Fear/Greed/Bonus: IIIIIIIIIIII Job loss: III Pressure: II Ego: II Peer’s: II
Scrutiny / Sanction: IIIIII Guidance: I Support: II Control: II Personal Acc: I Training: I
Table 4a: Perceptions of Insider Trading Activities in Investment Banking
Does this take place? How often? Daily; weekly; monthly; annually
If discovered would it be reported? Yes always; yes sometimes; yes but rarely; no never
Historically: Yes Today: rarely I Yes: IIIIIIIIIIIIIIIIII No: I
Frequently: IIIIIIIII Opportunistically: IIIIIII
A: IIIII S: III R: IIII N: IIIIII
84
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BBC Business News 17.9.13 JP Morgan facing more regulatory scrutiny.
http://www.bbc.co.uk/news/business-24134167?print=true
BBC Business News 19.9.13 JP Morgan makes $920 million London Whale
payout to regulators. http://www.bbc.co.uk/news/business-
24159801?print=true
BBC Business News 19.9.13 Morgan flattened by Whale.
http://www.bbc.co.uk/news/business-24164889?print=true
BBC Business News 11.10.13 JP Morgan Chase reports quarterly loss on legal
costs. http://www.bbc.co.uk/news/business-24494888?print=true
BBC Business News 15.11.13 JP Morgan agrees $4.5 bn mortgage settlement.
http://www.bbc.co.uk/news/business-24967010?print=true
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The Times 8.12.13 Diamond back with £150 million float.
http://www.thesundaytimes.co.uk/sto/business/Finance/article1349832.ece
The Times 6.2.13 Timeline: Libor-fixing scandal
http://www.bbc.co.uk/news/business-18671255?print=true