In general, within the industry the incentives to act in a willfully blind manner are quite high—that's why there are several reported examples of banks being prepared to do business with corrupt African potentates whose official salary is $10,000 a year, even though they are banking $500 million. How can you not think that something might be amiss in such a relationship? Fundamentally, I don’t believe that the risks of failing to ask all of the right questions yet outweigh the rewards. There simply is not a big enough fear factor in the finance industry to dissuade individual decision makers from doing business that is questionable but highly profitable. The approach to enforcement is completely misconceived, and until we convince decision makers in the industry that they have "skin in the game" nothing is likely to change. Fining legal constructs while decision makers remain with their feet under the boardroom table does not work.
Lam: In your opinion, what can be done to realign incentives and convince decision makers that they have "skin in the game"?
Platt: Great question. I think of this is as a series of concentric circles. In the centre, we have a bank employee and we need to influence his or her behavior. The next circle is senior management, then the board, then the legal construct of the institution, then the regulator, then the government, then political parties, then society and finally "capital." How do each of the circles bring a positive or, more often, negative influence to bear on the behaviors displayed in the inner circles?
So the answer to your question, the government needs to provide the tools to the regulators and set the policy agenda. The difficulty is the influence the banks have on the outermost circles, in particular political parties and crucially the control that they exercise over large pools of development capital. We have to recognize how difficult it is for governments to begin to take effective action because of corporate capture. No government wants to cause perceived economic harm by scaring off capital to friendlier climes. It is difficult to find a politician whose chief interest is not only being re-elected, and who has a longer field of vision than four to five years—which is why not a great deal has changed even since the crisis, and the scandals are continuing.
We can realign in the way you suggest by changing policy and ensuring that the stick is at least as big as the carrot. Government policy (and action) must be that the risk has got to match the reward of acting in a manner that is harmful to society.
Lam: Is there an estimate for how much criminal capital there is in the world, and in our banking system right now?
Platt: Drugs account for about $400 billion, and then estimates suggest that all other crime top it up to $2.1 trillion annually. That's a lot of money that can make a lot of good people make questionable decisions.