Finance on trial: The uses of rules in the justification of white-collar crime

by Thomas Angeletti

“Banks got bailed out, we got sold out” was one of the slogans heard in the Occupy movement in 2011. At that time, such critiques of financial institutions grew strongly. Banks were portrayed as being responsible for the crisis and simultaneously receiving important support from states, especially in the form of bailouts.

These critiques did not just interrogate the moral responsibility of banks: they have also called attention to the extent of fraud in the financial industry, and therefore on their potential criminal responsibility. Indeed, while a 2017 report shows that banks paid more than $321 billion in penalties since the crisis, only a few actors have been prosecuted.

But how do financial actors actually respond to such accusations, when facing public blame as well as criminal charges?

To answer this question, I engaged in an ethnographic investigation on the first criminal trial of a trader as part of the Libor scandal, which took place in London in the summer of 2015. In this recent study, I found that the reference to rules plays a key role in justifying one’s behaviors in relation to financial fraud.

How do people justify financial fraud?

The case is, perhaps, well known. Libor or London Interbank Offered Rate is a decisive benchmark in the financial industry. Not only does Libor serve as an indicator for borrowing possibilities between banks, but countless financial products are indexed to Libor, from products dedicated to the financial industry to those aimed at households, such as mortgages and student loans. In fact, the institution in charge of the administration of Libor until the scandal, the British Bankers Association, estimated the total value of products linked to Libor to exceed $300 trillion in 2012.

Since 2012, precisely, investigations and judicial proceedings began over the manipulation of Libor by financial actors, especially in the United Kingdom and in the United States. In 2015, the first trial of a trader accused of manipulating Libor and charged with eight counts of conspiracy to defraud took place in a London criminal court over a period of three months.

Justifications are, of course, required when giving a testimony, especially when facing a jury. This is the case for defendants mostly, but also for witnesses who have to respond to questions from both the prosecution and the defense. But such justifications are not randomly expressed and respond to clear social logic: as Mills said, the “different reasons men give for their actions are not themselves without reasons” (Mills, 1940:904).

Looking at the debates and disputes within the courtroom allowed me to distinguish three types of justification based on the position occupied by the one offering the justification: the maker, the interpreter and the user. Each of these justifications involves and combines a conception of rules, a narrative and a form of responsibility.

The uses of rules

In a first type of justification, which I call the one of the maker, rules are conceived as strict and as perfectly adapted to prevent any fraud. Such justification is usually adopted by individuals who are representing the institution of making and using the rules, i.e. banks and the British Bankers Association. As the rules are presented by the maker as timely and adapted, only an individual with bad intentions could break the rules. Indeed, this justification aims to individualize responsibility: in this case the one of the trader-defendant.

A second type of justification, the one of the interpreter, pleads the relativity of rules. Rules are of course important, sometimes even required, but their actual use has to be replaced in a certain situation and context. For instance, the manager of Libor within the British Bankers Association at the time of the scandal explained during the trial that the definition of Libor needed to be interpreted. Such interpretation was justified, from his view, in regard to the specific situation of the scarcity of credit in the credit crunch period of 2008. He added that one needs to distinguish the “letter of the definition” of Libor from “the spirit of the definition” of Libor. The interpreter widens the definition of rules and reminds that they are relative and always open to interpretation. By doing so, he clearly dilutes responsibility.

Finally, a third type of justification can be identified: the one of the user. The user justifies financial fraud either by denouncing the absence of rules or by contesting their constraining effects. In the Libor case, the trader on the dock for manipulating Libor argued that “there weren’t any rules”. “What rules have I broken—added the trader—? And moreover this is totally consistent with other people’s behavior and all my managers knew”. The user’s justification integrates a hierarchical component: individuals above him could not not have been aware of his actions. By doing so, the user widens the conception of responsibility, and clearly put the institutions in charge of the rule on the spot.

Justifications and the tolerance towards white-collar crime

If these justifications consist of different ways of explaining one’s behavior, they do not come without downsides. By fetishizing rules and assuming their constraining effects, the maker appears as almost denying any possibility of fraud and of a misuse of rules. If rules are all open to interpretation, as the interpreter argues, it appears really difficult to define and defend their real role. Finally, the user, by strongly criticizing how rules are not followed, appears as a denouncing figure that can easily be isolated from the collective.

My analysis suggests that justifications are not only a rationalization of an action which appears after its realization. Far from it, justifications are conceived as public and available reasons of acting, which accompany individuals in the overall phenomenon of fraud. And such justifications indeed contribute to the relative tolerance towards the white-collar crime. It is worth noting that a decade after the financial crisis, prosecutions against individuals remain rare, and even rarer for every rung of the social scale of the financial industry you climb.

Follow-up investigations should precisely extend beyond the limited criminal cases for financial fraud, and look into other contexts of judgment, when facing financial markets authorities or even within financial firms. Such research would contribute to a better understanding of the common place of rules within the financial industry.

Thomas Angeletti is a sociologist and CNRS research fellow (IRISSO-Université Paris Dauphine). This post summarizes “Finance on Trial: Rules and Justifications in the Libor Case” in the European Journal of Sociology.

Image: Thomas J. O’Halloran via Wikipedia Commons