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What is ‘financial crime’?

This website is all about financial crime. Approaches to the definition of financial crime can differ, depending on who you read and the jurisdiction concerned. In the United Kingdom, the Financial Conduct Authority, which is one branch of the dual regulator, takes an approach which focuses on offences. Therefore, financial crime is any kind of criminal conduct relating to money or to financial services or markets, including any offence involving fraud, dishonesty, misconduct or misuse of information in relation to a financial market, the handling of the proceeds of crime, or the financing of terrorism. (FCA Handbook, Glossary). By contrast, in the US, the Federal Bureau of Justice Statistics quotes the Dictionary of Criminal Justice Data Terminology which defines ‘white-collar crime’ as nonviolent crime for financial gain committed by means of deception by persons whose occupational status is entrepreneurial, professional or semi-professional and utilizing their special occupational skills and opportunities; also nonviolent crime for financial gain utilizing deception and committed by anyone having special technical and professional knowledge of business and government, irrespective of the person’s occupation. This definition is focused less on the types of offence which might be regarded as financial crime, and more on the category of offender and the motivation, namely, financial gain. However, this might be regarded as a little dated given it is focused on the types of offender when this may be less appropriate today given that technological advances have reduced barriers to entry for those intent on causing a loss to others or making a gain for themselves. A sufficiently dedicated amateur could establish a romance or tech support scam with limited effort and capital. Of course, I may be a little unfair. This definition was in use around 40 years ago and it might be fair to say that financial crime is now seen through a different prism. Coming into the modern era, Pickett and Pickett, Financial Crime Investigation and Control (2002), provide the use of deception for illegal gain, normally involving breach of trust, and some concealment of the true nature of the activities. This is a brave definition of itself in that it would require a significant level of heavy-lifting were anyone tasked with interpretation of it in a legal context. That said, they do provide a setting for it by providing characteristics which might commonly be found in financial crime.

Therefore, financial crime is deceitful and intentional. These are easy to embrace. Financial crimes typically concern deception, broadly understood, irrespective of the specific offence committed. It is also the case that if they are deceitful, then they would be intentional. Financial crime does not happen by recklessness or negligence. Of course, those things might cause loss, but those losses would be recoverable in civil law. Pickett and Pickett go on to suggest that financial crimes involve trust which is breached. Certainly, some fraudsters will often gain the trust and confidence of a victim prior to executing the fraud, typically in romance or tech support scams. Breach of trust might also occur in a professional services context where, for example, inside information is provided to a legal professional or banker and it is then exploited for personal financial gain. These professionals have a relationship of trust and confidence with their employer which such action would undoubtedly breach. While they provide others, it becomes easier to see what amounts to financial crime by looking at its common characteristics, rather than seek to list everything which might be regarded as a financial crime, especially as the latter involves a little bit of chicken-and-egg philosophical reflection.

The approach of Pickett and Pickett is cited with approval by Petter Gottschalk, Categories of Financial Crime (2010) 17(4) Journal of Financial Crime 441 – 458, so you will find all their characteristics in that article. However, Gottschalk’s definition takes us in a slightly different direction in our quest to determine what amounts to a financial crime.

‘Financial crime is often defined as crime against property, involving the unlawful conversion of property belonging to another to one’s own personal use and benefit. Financial crime is profit-driven crime to gain access to and control over property that belonged to someone else….

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Financial crime often involves fraud. Financial crime is carried out via check and credit card fraud, mortgage fraud, medical fraud, corporate fraud, bank account fraud, payment (point of sale) fraud, currency fraud, and health care fraud, and they involve acts such as insider trading, tax violations, kickbacks, embezzlement, identity theft, cyber-attacks, money laundering, and social engineering…. Financial crime sometimes, but not always, involves criminal acts such as elder abuse, armed robbery, burglary, and even murder. Victims range from individuals to institutions, corporations, governments, and entire economies.’

This definition has the advantage of taking the discussion forward suggesting that financial crime is not merely non-violet, as earlier suggested, but can include instances of physical harm to bring about financial gain for another. It is easy to imagine a financial crime where an insured person is murdered by the nominee of an insurance policy so that they receive a pay-out. However, it could be broader than this, especially when reflecting on the wider issue of financial misconduct and its impact on the physical and mental well-being of humans. In 2014, the British Journal of Psychiatry published research which identified the global economic crisis (2007-2009) as accountable for a rise in suicides between 2008 and 2010. By comparing suicide data from before 2007 with the years of the crisis, the research estimated around 10,000 “economic suicides” associated with the recession across the U.S., Canada, and Europe. Of course, the global financial crisis might not necessarily be regarded as the product of financial crime. However, there is a developing body of research pointing to corruption as being a contributing factor, by the abuse of conflict of interest, as well facilitation through benchmark manipulation (see, generally, Herzog (ed), Just Financial Markets?: Finance in a Just Society, OUP (2017)). Indeed, research by Brody and Perri, Fraud detection suicide: the dark side of white-collar crime (2016) 23(4) Journal of Financial Crime 4, demonstrate the association between suicide and white-collar crime such that it may receive the label ‘red-collar crime’, a term typically associated with violent crime committed by white-collar criminals to conceal their activities.

This leaves us in a position where financial crime should be appreciated as more than a list of offences, but that the risk, where one takes a characteristic-led approach, is that it tends to bring about an over-inclusive taxonomy of financial crime. While this should be avoided, it is certainly the position that an understanding of financial crime which only focuses on the financial, and not on the physical or mental harm which financial crime inflicts, is one which is deficient.

What drives the fight against financial crime?

Where the challenges of defining financial crime provoke much discussion, there can be little doubt as to the appetite of policy-makers and law enforcement when it comes to fighting financial crime. There are national and pan-national agencies whose function is to prevent and detect financial crime, but what drives them?

The obvious opening position would be that it is crime and developed societies respond to criminal activity by ensuring that offenders are promptly and sufficiently punished. That is, of course, a general motivation. Drill down, and certainly those jurisdictions which have a highly evolved financial system frequently cite the preservation of the integrity of the financial system and its institutions as a primary motivation for responding to financial crime. In the UK, where a significant part of GDP is provided by services, and particularly financial services, it should come as no surprise that the maintenance of the integrity of the financial system is a statutory objective of the Financial Conduct Authority (‘FCA’). Part of this integrity responsibility is oversight of financial crime, at least insofar as it touches and concerns those individuals and entities regulated by it. Other financial services regulators have similar objectives. Of course, because everything is connected to everything else, the integrity of the financial system links to the maintenance of the payments systems, ensures that tax revenues flow undisturbed to the Treasury, which means continued public funding for schools, hospitals, and so on. At a global level, countries respond to financial crimes because other countries respond to financial crime. If a country wants to play the game of international finance, it does so by observing the global rules. If it decides it does not want to play by the global rules, then it is excluded, and one only needs to look at the Financial Action Task Force’s High-Risk Jurisdictions subject to a Call for Action to see which countries do not play by the rules. For more on the motivations, see Harrison & Ryder, The Law Relating to Financial Crime in the United Kingdom.

To conclude, while none of these motivations is especially unique to financial crime, indeed many of them are often cited as reasons to regulate financial services in general, what they do is provide a focus for the underlying policy objectives allied to the response to financial crime, and they can allow those studying financial crime the opportunity to understand why prohibitions are placed on certain activity.