White-collar crime, and particularly fraud and wrong-doing in the City of London, has been ignored by regulators and the judiciary for too long. The global financial crisis has highlighted how, if left unchecked it can cause almost incalculable damage to ordinary people’s lives and the wider economy.
The biggest disincentive to City criminals would be the fear that, if they commit a criminal offence, they will be hauled before a judge and punished in the same way as ordinary criminals.
However, despite my enthusiasm for such treatment, and my long-standing belief in the superiority of the US approach to ‘white collar’ crime, I believe that any society that believes in stamping out wrongdoing by depriving wrongdoers of liberty and their ability to earn a living must do so fairly, justly and by the rule of law.
I would add that the US approach to law enforcement is still fairly rough and ready. In many parts of the US, the judge, the chief of police, the sheriff, marshal, is still a political role. These men and women get elected, or appointed as part of the political process. The erstwhile scourge of Wall Street Elliot Spitzer, was a classic example. If such people want to get re-elected, they have reflect the views of their voters. UK law enforcement is entirely different. Our laws of evidence are different, our standards of proof are much higher, we outlaw forms of evidence gathering that are acceptable in the US, including wire-taps, secret taping of conversations, the use of agents-provocateurs etc.
Against this background, I heartily recommend A Price to Pay: The Inside Story of the NatWest Three, by David Bermingham. It is a must read for anyone with an interest in law enforcement in the financial sector. It provides a shocking insight into uneven extradition procedures between the US and the UK.
David Bermingam and his colleagues were investment bankers at NatWest, just before it was acquired by the Royal Bank of Scotland, then led by Fred Goodwin. They became involved in a series of structured financing deals with the Texas based energy giant Enron.
Those deals are described in mind-boggling detail in the book. Throughout my reading, I kept on asking myself what was the social purpose any of these deals. The deals were structured and created so as to maximize secrecy and opacity, with the sole aim of generating vast paper profits that could be parked in secrecy jurisdictions. They had the added benefit of earning huge fees for NatWest, and thereby, making bigger bonuses for their creators.
Revolting and morally dubious though it was, the thing to remember is none of this was technically illegal. The people putting together the structured deals were doing nothing that any other City institution was doing — creating obscene amounts of phantom wealth out of thin air, using the alchemy of derivatives to create structures that would subsequently unwind, paying out millions of pounds (and it didn’t matter if the shareholder were ultimately paying for it, not as far as the law was concerned anyway).
Not one penny was channelled into any form of social development, into the alleviation of any human suffering, building any infrastructure, or putting anything back into the societies from which the money was being squeezed. It was a vast money-go-round, which created vast wealth for a select few, lining the pockets of countless other bankers, intermediaries and professional advisers along the way.
This sort of activity was actively encouraged by the prime minister Tony Blair (pictured left, at one of his ‘love ins’ with President George W Bush) and chancellor Gordon Brown, who in an orgy of misguided deregulatory zeal, rolled out the red carpet for people behind social useless, greed-fuelled and perilously founded money-go-round. Yes Brown and Blair genuinely wanted to have even more such people in the City of London, believing it would be good for UK plc!
Unfortunately for the ‘NatWest Three’, they were dealing with Enron. Not only was the energy trading firm the biggest and most important employer in Houston, Texas. It was also, perhaps, the crookedest firm in the world. Led by a crook, managed by a bunch of crooks, audited by crooks, Enron would later go down in history as the world’s biggest corporate fraud and failure. The culture ran deep. In addition to effectively stealing from their investors, many of the guys at the top of Enron were also running private scams on the side. It was with one of these ‘sidebar’ scams that the three British bankers had the misfortune to become involved.
You’ll have to read the book to understand the full facts. But suffice to say, the ‘NatWest Three’ (the other two were Giles Darby and Gary Mulgrew) committed no crime in the UK known to UK law. There were no complainants, no victims, at least none who wanted to make any complaint. Throughout, they behaved with a complete lack of any dishonest motive.
Whether what they did was moral, decent or honourable is another matter, but we do not judge men in the criminal sphere by their lack of morals, decency or honour, and David Bermingham does explain that, according to the City culture of the day, they were merely half-witted, even though more sensible people would doubtless would have said ‘let’s get the fuck out of here’!
And yet these three men were extradited to America to stand trial and were sent to prison, not for defrauding Enron, but for defrauding NatWest Bank. Yes, you read that right, they were prosecuted in America for an offence which, even if it were half true, which it wasn’t, could only have taken place in the UK. But as I have said, US law doesn’t allow inconvenient facts to get in the way of a good prosecution!
When Enron went spectacularly bust in December 2001, the mood in Houston turned ugly. The collapse left many Houston inhabitants unemployed, as well as decimating their 401K pension funds. In this febrile climate, prosecuting people who might have been said to have had something to do with the frauds that brought down Enron was a bit like shooting fish in a barrel. The Houston prosecutors knew this full well, exploited it to the full, and set their sights on the ‘NatWest Three’.
The most shocking aspect of the saga is the behaviour of British authorities and other institutions. After the NatWest Three voluntarily went to the FSA and told the regulator their story, after they became aware of the hint of fraud in their Enron dealings, the regulator parcelled up their evidence and sent it straight to the US authorities.
It was later used as the basis of the prosecution’s case in Texas. The FSA clearly realised that no offence had been committed in the UK, but this most spineless of institutions likes to play hugger-mugger with its regulatory mates in the US, in the hope of reciprocal information in the future. So they sold three men down the river.
Royal Bank of Scotland, led by former chief executive Fred Goodwin, could readily have provided sufficient evidence to prove the innocence of Bermingham, Darby and Mulgew. But the bank blankly refused to give them any help. In this, the bank was reflecting the attitude of the British legal establishment, which bent over backwards to facilitate the US request for extradition, even though there were no reciprocal offences being alleged against the accused. In a similar vein, most British politicians simply washed their hands of Bermingham, Darby and Mulgew.
A Price To Pay: The Inside Story of the NatWest Three outlines the problems that foreigners face in confronting the US justice system if they’re unlucky enough to fall foul of its grasp. It shows the costs and expenses involved, and how, at the end, worn down with repeated adjournments of their trial, the NatWest Three were faced with a stark choice of pleading guilty, which would have meant serving a relatively short imprisonment, or fight the case, be inevitably convicted, and spend many, many years locked up in an American penal institution, with no hope of parole, reconciliation or return to their loved-ones.
It is a shocking story, it is a terrifying story, and it needs to be read.
I have met and talked to David Bermingham. I believe him. I like him as a person. The story of the NatWest Three is shows English justice in a very poor light. The politicians and bankers who connived in this ought to be ashamed of themselves.
In future we should ensure that, before anyone is extradited to the US, the British courts have first satisfied themselves that they have at least committed an offence in America that would be recognised in our Courts and that credible evidence exists to back up the allegations. And noone should be sent for trial to a foreign country if evidence to prove their innocence is available in this country (as was the case with the NatWest Three.
We will never know what pressure was placed on Goodwin and RBS by US prosecutors to with-hold the exculpatory evidence from the NatWest Three. Suffice to say that despite personal pleas to the bank, its lawyers and even to Goodwin himself, at no time did RBS lift a finger to assist its former colleagues. (Ian’s note: there have been suggestions that the Edinburgh-based bank’s reluctance to help the three may have stemmed from a desire to avoid highlighting the role of other RBS and NatWest executives in structuring deals for Enron – see Footnote). It is my sincere hope they will get their comeuppance at some future time.
I am not going soft in the head. I have told David Bermingham that, in my view, he and his two colleagues were the architects of their own downfalls, not least through their misguided decision to speak to the FSA in the belief this might be a proper way of dealing with the issue. It didn’t even occur that this most feeble and duplicitous of regulators would assist RBS by using the information they provided as a bargaining chip. If there is a moral in this tale, it is probably ‘never talk to the FSA’.
Read this truly scary book and learn its lessons. It should be a mandatory reading for everyone working in UK financial services.
Note 2: There are clearly a range of perspectives on the trial of the NatWest Three. Andrew Clark, deputy business editor of the Times, who covered the case for The Observer, disagrees with Rowan Bosworth-Davies’s analysis, saying that Bermingham, Darby and Mulgrew were far from being just “half-witted”. It’s also worth remembering that they plead guilty, said Clark, who also suggests reading the affadavit of FBI agent Deanne Simpson. This details the involvement of the NatWest Three in structuring, and benefiting from, an off-balance-sheet vehicle named LJM Cayman, in which Enron’s CFO Andrew Fastow invested £1m.
Note 3: Rowan Bosworth-Davies writes:
I would like to know what Andrew Clark would have done faced with the same invidious choice that these guys faced. Pleading guilty in order to get a case over with is not evidence of gullt. That is why UK courts are concerned to ensure that defendants do not enter what are known as ‘equivocal’ pleas, saying they are guilty when they really believe they are not guilty, just to get the process over with. In the US, no-one gives a damn about such things.