Barclays Bank and the Differential Association Theory

The Barclays case is the first criminal prosecution faced by a bank for financial crisis related misconduct.

In the UK, to convict a company, prosecutors must generally show that a senior employee, usually one who sits on the board, intended for the wrongdoing to occur. This is very difficult to prove, especially in large and global companies where complex chains of commands between thousands of employees mean senior executives can claim ignorance of pervasive wrongdoing by their own staff.

Mr Varley and Mr Jenkins, both aged 61, face two counts of conspiracy to commit fraud by false representation over two emergency cash calls when Qatar invested £6.3bn to keep the bank out of UK government control.

The SFO has brought the following charges:

• Conspiracy to commit fraud by false representation in relation to the June 2008 capital raising, contrary to s1 and s2 of the Fraud Act 2006 and s1(1) of the Criminal Law Act 1977 – Barclays Plc, John Varley, Roger Jenkins, Thomas Kalaris and Richard Boath.
• Conspiracy to commit fraud by false representation in relation to the October 2008 capital raising, contrary to s1 and s2 of the Fraud Act 2006 and s1(1) of the Criminal Law Act 1977 – Barclays Plc, John Varley and Roger Jenkins.
• Unlawful financial assistance contrary to s151 of the Companies Act 1985 – Barclays Plc, John Varley and Roger Jenkins.

 

Is Barclays case and the charges brought over an example of what the culture and the 'tone at the top' of any organisation should not be? Is the reflection of a failure of the control environment which leads to other actions top down such as the LIBOR rigging case?

For that, I would like to consider one of the most influential theories of fraud and corruption, the Differential Association Theory, was presented in the 1930s by the American sociologist Edwin Sutherland and published in his classic White Collar Crime (1949/1983). It stated that criminal behaviour was something learnt:

...criminal behaviour is learned in association with those who define such criminal behaviour favourably and in isolation from those who define it unfavourable, and ... a person in an appropriate situation engages in such criminal behaviour if, and only if, the weight of the favourable definitions exceeds the weight of the unfavourable definitions.

 

Crimes are committed when people think, or construct a reality, in which it is better for them to commit crime than not. The quote suggests that criminal behaviour is learnt together with others.

The 'Differential Association Theory' is supported by the fact that the same fraudulent behaviour spreads rapidly within an organisation or group. For example:

• People who speak up get fired and sometimes offered money to shut up.
• Management have secret ownership in suppliers and distributors, and they get good deals.

 

There are instances in which actual cases of misconduct cannot be isolated to a certain individual but is being spread as a sub-culture in the organisation, like a kind of social rot or moral decay.

The relevance of an organisational perspective on white-collar crime is also supported by the observation that the same kind of criminality can persist in a company after the original perpetrator has been removed or brought to justice. It often takes a deeper cut in the organisational pyramid and a deliberate change in culture over time to make it finally disappear.

We can also introduce here a certain kind of fraudster, the 'innocent' fraudster, who has been trapped in a peculiar sub-culture, honestly believing that what they do is approved by management and aligned with local traditions.

British banks have paid just over $2bn in fines to the Financial Conduct Authority for LIBOR and FOREX related wrongdoing.

Others accused of wrongdoing have completely escaped criminal prosecution in the UK. This includes HBOS, where serious organisational failings in the corporate impaired assets division were identified by a Bank of England report into why the financial institution failed. Individuals who had worked in this division were convicted in January 2017 of fraudulent trading, corruption and money laundering, but no action has been taken against the company, which is now part of Lloyds, despite a corporate culture that allowed excessive risk taking.

One way in which fraud and corruption avoid public blame, was called by the American business ethicist Richard De George (1982/1990) 'The Myth of Amoral Business'. What this myth claims is simply that business is concerned with a highly pragmatic search for profits and individual careers, and that moral concern is and should be left out of the reflection around practical business problems. If fraud and corruption exist in business, that is no cause for alarm or action.

The myth does not explicitly say that business is immoral, rather that business leaders sometimes act without concern for moral aspects, thus creating scandals along the way. Is that the case of scandals we have seen with financial institutions relating to the period during or prior to the financial crisis?

On the other hand, silent and cynical bystanders remain passive because they believe that corrupt behaviour is the norm among managers and, accordingly, nothing to be too upset about.

Why spend time and effort on being successful if the appearance of success suffices?

The criminal trial of John Varley, the former chief executive of Barclays as well as three other former Barclays bankers has been set for January 2019.