There are many adjectives we associate with the City. Not many are flattering. Venal, greedy, and selfish are just a start. But we don’t generally think of it as a particularly corrupt place. Sure, the days when a man’s word was his bond in the City are past. Nobody does business now without three or four hundred pages of densely worded legal documentation to back them up. Yet overall, financial markets have remained fairly honest. But there are worrying signs that this could be changing.
In New York, the Securities and Exchange Commission (SEC) has launched a big investigation into whether financial firms paid bribes to secure investments from sovereign wealth funds (SWFs). It would be wrong to pre-judge that inquiry. No firms have been named, no charges pressed. Yet the finance industry, including banks, hedge funds and private-equity funds, is becoming more prone to corruption and bribery scandals.
Huge amounts of capital are now controlled by SWFs, based in countries with long records of corruption. The state is now a big player in the banking industry. Both mean there’s a higher risk of corruption. The finance industry should find a way to stamp down on it now. If it doesn’t, bribery and dishonesty could become as endemic as they are in the defence industry and everyone will suffer.
The SEC investigation into whether bribes have been paid to officials at SWFs is the first worrying sign. If that is indeed what is happening, it would seem likely that City-based banks are doing much the same thing – after all, they are mostly the same institutions, chasing the same pools of capital. And it wouldn’t be that surprising if they were. To put it delicately, most of the SWFs are based in countries where the standards of honesty in public life are not what you would expect of, say, Guildford Borough Council.
There is a simple measure of that. Every year Transparency International publishes a list of the most honest and the most corrupt countries. Many of the big SWFs just happen to be in places fairly low down the ranking. For example, Saudi Arabia ranks at 50, China at 78, Libya at 146, and Russia at 154 out of a total 174.
There are some exceptions – Norway has a big SWF from its oil wealth, and no one thinks it’s dodgy. But huge amounts of potential business are controlled by a few public officials in relatively corrupt countries. That means it is easy for bribery to flourish. After all, why not pay a kick-back of $1m to a middleman if it means you get a $500m investment in your fund? It’s hard not to resist – particularly when the guy from the next fund is willing to make the payment.
Nor can banks and hedge funds ignore that money. SWFs control a vast amount of the world’s free capital. Total assets controlled by the funds reached $3.59trn in 2010, according to a report by the research firm Preqin. They are active with that money as well. More than half make private-equity investments and 37% invest in hedge funds. You can’t ignore all that cash.
Next, the finance industry has itself become intertwined with governments in a way that it never was in the past. Some are majority owned by the state. Others still have significant state share holdings. Yet the record clearly shows that wherever business and politics are mixed up, corruption almost invariably flourishes. For both of these reasons, it would be very easy for a culture of corruption to take root in the City – as it has done in the defence industry, for example.
But that is dangerous for everyone.
You can debate whether or not it is really immoral to pay a $1m dollar ‘fee’ to get a $500m investment for your fund. If that’s just the way that things get done in some countries, so be it. Far worse things happen in the world. But regardless of the morality, such practices are bad news for everyone in the medium term.
It may be tempting to pay a small bribe to get a big investment. But very soon it just becomes part of the cost of doing business. You’ll end up having to pay $100,000 to someone every time you simply want to get a meeting, and you won’t even necessarily get the contract. And you’ll end up fending off constant regulatory investigations, in the same way the arms manufacturers do. So it would be better to stamp down hard on it now.
How? There are three good places to begin.
One, start with the small stuff. The finance industry has always lavished ‘hospitality’ on clients. The London lap-dancing industry is supported by it. But small bribes lead to big bribes. Cut down on that and it will promote a cleaner culture.
Two, promote transparency. The banks, hedge and private-equity funds could publish more details of the cost of raising funds. That would make it easier to spot whether bribes had been paid.
Three, the banks should talk amongst themselves. If one player pays bribes, soon you all have to. If all the banks agreed they wouldn’t pay up, pretty soon people will stop asking.
Only by stamping down hard now can the City make sure that ‘corrupt’ doesn’t join the list of unflattering adjectives we already use to describe the financial markets.