Economic crime

It is glamorous, difficult to unravel, but definitely serious enough to receive ceaseless attention from government, law enforcement and the media.

Jerome Kerviel, an

RENOWNED criminologists across the globe are nearly unanimous that the hyper economic activity that is now on will impact visibly the nature of crime. It is not as if traditional methods of crime will be displaced by new forms of deviance. They will continue, especially in rural areas where economic activity such as money laundering, trading in shares, and stock exchange transactions is relatively unknown. In the days to come, what is bound to attract sections of the youth and the middle-aged groups looking to make a quick buck is the holes in business and industry that are ready for exploitation.

Investment banking, which has a certain romance and adventure attached to it, has always shown itself to be extremely vulnerable. The profits can be enormous and the facility to hide ones misdeeds for a long time so inviting that frauds are easy to perpetrate on gullible and lax organisations. It is a matter of surprise that we do not have more instances of fraud than those that are publicised by the media. One can attribute this low level of reporting to the reluctance of many leading financial institutions to admit that they had been taken for a ride. There are also not many whistle-blowers who are willing to take the risks involved in exposing failures of controls or downright attacks on existing internal anti-fraud systems.

Jerome Kerviel, a 31-year-old employee of the Societe Generale (SocGen), Frances second largest bank, next only to Bank Paribas, was in the news recently for having caused losses to the tune of 4.9 billion to the bank. Friends of Jerome and his colleagues at the bank who saw his picture on television and in the newspapers could not contain their surprise that of all persons, Jerome was accused of such a colossal fraud. His teachers at the low-profile Lyon University, from where he got his Masters degree in Finance, were equally baffled. This is a clue to the nature of economic crime. Do not ever believe that a person who comes to adverse notice must be one who has a remarkable visage or extraordinary mental prowess. Stereotypes who do not reveal an ambitious streak can still play with money for the sheer thrill it offers. Notwithstanding his mediocre background and appearance, Jerome will remain chronicled for ages in crime treatises along with several famous names.

Talking of names, many come to my mind. The most famous of them all is, of course, Nick Leeson, the British employee of the then unbelievably strong Barings Bank, who scaled new heights in criminal impropriety. After studying in England and a brief spell in Morgan Stanley, Leeson managed to get a position at Barings, then the oldest British merchant bank, in their Far East operations. Since arriving in Singapore in 1992, he enjoyed his near total autonomy in the area of futures and options. He took several unauthorised speculative positions which ultimately led to a loss to Barings to the tune of 830 million and which eventually led to its collapse.

As in the case of Jerome Kerviel, Leesons recklessness hardly attracted attention from his bosses who believed he was doing a great job. What was most interesting was that apart from falsifying accounts, Leeson borrowed money from other institutions of the Barings Group itself to hide his losses to some extent. After fleeing Singapore to Kuala Lumpur, he was arrested in Frankfurt and brought to trial in Singapore on charges of fraud. Sentenced to six and a half years in prison, he was given a remission of two years. Back in England, Leeson is now a near celebrity. He is invited to several public lectures to speak on the Barings collapse. He is naturally quite prosperous. He has also authored two books, The Rogue Trader (later made into a movie) and Back from the Brink which deals with his life after prison.

Many reports on the SocGen fraud have drawn a comparison between Leeson and Kerviel. Such comparison is justified only to some extent. The age difference between them was just three years, Kerviel being older by three years. Both worked for very old banks known for their tradition and strict controls. Neither was known for any great academic brilliance. Also, there was no report that either of them made money out of their misadventure. One theory is that Kerviel expected to earn a huge bonus from the deceptive profits he brought to SocGen, when the bank was losing enormous amounts.

Nick Leesons work

There was, however, one difference between the two infamous bankers. While Kerviels entry into investment banking from an IT responsibility was a routine event, Leesons admission to the elitist ranks of investment bankers was after he sought and obtained from senior management a place in the Far East where he plunged into the task of setting right the mess at Barings in Jakarta.

He proved himself there and rightly attracted attention and was given responsible and exciting jobs that his seniority did not warrant. Also, he was given dual positions in the bank investor as well as administrator ignoring the obvious conflict of interest between the two. Nothing of that kind is said about Kerviel, repeatedly referred to as a colourless character who no passerby would stop to engage in a conversation. This is a perplexing paradox in terms of the kind of individuals who may be expected to play havoc with financial institutions.

Dwelling on our own setting, we had our Haridas Mundhra (Life Insurance Corporation scandal of the late 1950s) and Harshad Mehta (1990s). As far as I know, both were extremely suave with people, especially bankers, with whom they interacted closely and took them for a ride. The one sidelight I distinctly remember is how Harshad Mehta tried to prove that he took a huge sum of money to a VIPs place in a suitcase, possibly as illegal gratification. When challenged how he could accommodate so much money in a small suitcase, he gave a public demonstration that amused the media and the public, but definitely not those who had allegedly received the money.

Financial transactions are undoubtedly growing in complexity all over the world. India is no exception. The amounts of money involved have multiplied beyond belief. So have the number of players who come from different walks of life, either as investors or as those who manage such investments. These have spawned a variety of regulations and a host of institutions to enforce them. All such developments are natural. What is of concern is the growing sophistication of deviant elements who are determined to set these regulations at naught. Complicated computer systems and controls have not deterred them. On the contrary, these have helped them to hide their misconduct, as in the case of SocGen.

Another factor that has entered the murky world of trade in money is the fallout of terrorism since 9/11. There is not a single institution of some consequence that terrorists of the Al Qaeda kind have not attempted to infiltrate. The stock market is one such body that is vulnerable to insidious interference by people who want to distribute money to fuel conspiracies aimed at wrecking the peace. One significant but off-the-cuff remark made to this effect by our National Security Adviser a few months ago caused more than a ripple. Although he did not spell out the details, we believe that as a responsible official he had enough material on hand to make such a sensational disclosure. What he did share with the nation was enough to set in motion a series of measures that will at least partially protect the stock market.

I am certain that information technology will play some role in uncovering conspiracies. This is an interesting prospect that confirms the popularly held belief that economic crime is glamorous, difficult to unravel, but definitely serious enough to receive ceaseless attention from government, law enforcement and the media.