Illicit financial flows and executives' liability: a normative proposal

Nili opened the discussion by asking the audience about the ethical implications of "buying oil from the Putins of the world" - at first a puzzling and admittedly uncomfortable question. If you wonder why political philosophy and theory are interested in such questions rather than in formulating an ideal vision of the world, notice how the very language used suggests that something is wrong and needs to be addressed - after all, the oil belongs to the Russian people and not to the 'Putins'. So in general terms, what if the rightful owners are excluded from the revenues of their resources? And inversely, what if "illicit financial flows", understood as "funds accumulated from illegal activities and destined to fund further illegal activities", were to make their way into the financial system from drug and human trafficking, or other shady activities? How do our legal systems respond to such situations? Is the system operating effectively and appropriately when HSBC can get away with a $1.9 billion fine for laundering Mexican drug money and thereby avoid prosecution on the grounds that the loss of its US banking license might destabilise the financial system?

As Nili's presentation reminds us, these pertinent questions are not an abstract intellectual exercise but can be posed very directly and from an ethical perspective. Leaving aside the HSBC case and the obscene sums of money involved, we need to recognize that most cases under consideration are in a 'grey area' of low-level bankers inadvertently facilitating illicit financial flows. How then would we rule, if we found ourselves in the prosecutor's shoes? Some students intuitively suggested that the bank's top officials should be arrested and imprisoned or fined, as they are culpable through negligence at the very least. Given that, up until now, criminal law in most legal systems only holds the company or legal person responsible, should top officials be charged at all for failing to prevent money laundering of HSBC's kind? And how much of a moral difference does a charge of negligence and possibly attenuating circumstances make?

This is where Nili's very concise and normative proposal comes in: rather than threatening with imprisonment or a fine, law-makers should introduce individual legal responsibility sanctioned by the loss of stock options. Contrary to the 'stable expectations' that define ownership, stock options are, in theory, subject to unstable speculation - and deliberately so as they were originally introduced to align employers' interests with those of shareholders, and thereby avert moral hazard. This mechanism has, however, been increasingly manipulated by the practices of 'automatic reloading' and 'backdating', which pervert stock options into yet another salary. For these reasons, Nili argues, stock options are a simple and effective leverage to (re-)stabilise expectations and reinstate safeguards against insidious moral hazard and the hosting or facilitation of illicit financial flows.

An impassioned Avia Pasternak, lecturer in Global Ethics at UCL, objected, suggesting that a cut in officials' salaries of about 20% should be acceptable on moral grounds and suffice as a deterrent, given the stratospheric salaries on the top floors of the financial sector. However, a Global Governance and Ethics student ardently cautioned against undermining the interplay between merit and aspiration, and argued that cutting bankers' salaries risks further destabilisation of the financial system down the road. Even if the general sentiment in the room seemed to subscribe to Avia Pasternak's view, maybe even with a hint of animosity towards bank CEOs, a relativizing question was broadly granted: if not for practical reasons, why are bankers not insured against the risks of their activities, just like doctors or surgeons in particular?

In any case, ethical questions regarding executives' liability remain salient, especially bearing in mind that in the US, stock options are taxed at approximately the same rate as Shmuel Nili's wage, and considering that it only takes HSBC about 10 weeks to regenerate the $1.9 billion fine.

At the risk of drifting into a separate discussion on global financial regulation, I want to briefly relate these questions to a broader debate on financial governance through some personal thoughts. Though my country of origin was far from being the only one in the dock at the time, to me the terms 'illicit financial flows' brought to mind the era of the OECD's grey list, the Financial Action Task Force, and the obstinate persecution alleged financial havens were submitted to. Not only to a Luxembourger was this objectionable gauntlet suggestive of the idea that, despite the liberal-institutionalist achievements of the UN, the EU and so forth, some countries were just 'more equal than others' when it comes to fiscal sovereignty.

My point here, and I do have one, is that combatting the symptoms by political finger-pointing should not make us lose sight of the underlying, structural motives of illicit flows of any kind. As Afghan President Ashraf Ghani recently put it: "Yes, we acknowledge we are the largest producer and processer [of narcotics]. Who in the room will raise their hand as to where the largest consumers are?" Compared to the chasing of top officials, however unjustified their wages or negligent their internal governance structures might be considered, the refusal to address the global chains at the very root of the problem is the far more blatant injustice.

Without unnecessarily supporting the questionable links made between the financial crisis and tax avoidance or evasion, it is certainly true that transparency in financial regulation broadly speaking has made progress over the course of the last years, for instance with regard to Automatic Exchange of Information. And more significant progress with less of a blame-game might be yet to come, not least because of promising initiatives such as the 'Financial Transparency Coalition'. This initiative calls for the harmonization of anti-money laundering legislation, among other measures. Finally, global civil society actors have more in store for addressing underlying, but politically ignored, problems and injustices. As this is a separate debate, I will limit myself to submitting that initiatives of this kind will get us even closer to the solution from a global governance perspective.

While efficient legal liability is undoubtedly of utmost importance and great interest to scholars of different backgrounds, policy-makers ought first to address the underlying injustices that exist from the sphere of civil advocacy to the realm of political pragmatism. According to Josiah Stamp, former President of the Bank of England, "It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities".

So in the end, you cannot help wondering why international politics and world leaders in general are not as pragmatic and hands-on as Shmuel Nili.