The Case for a Financial WikiLeaks

By Brett Scott

May 15th, 2012 (edited May 16th, 2012)

The greatest barriers to financial whistleblowing are social and economic, not legal. Fear of being shunned by colleagues, passed over for promotion, bullied and harrassed, summarily dismissed and even shut out of Wall Street or the City for life plays a big part in dissuading executives who become aware of crimes and misdemeanours inside their organisations from blowing the whistle.

Occasionally, as we saw with Greg Smith and his remarkable New York Times op-ed Why I Am Leaving Goldman Sachs, an employee’s conscience gets the better of them. But fear of being ostracised for “spoiling the party”, coupled with an attachment to the high pay that a financial career can bring (you might call it ‘moral cowardice’) is sufficient to persuade the vast majority of putative whistleblowers to keep schtoom.

That’s why I believe we need a financial version of the whistleblowing website WikiLeaks. It would protect employees from management retribution and eliminate the social barriers to speaking out. There are already several leak sites available (check out the Leak site directory).

WikiLeaks has previously been used for financial leaks relating to the banks Julius Baer and Barclays, and in 2011 there was speculation that it was sitting on a treasure trove of incriminating information that might bring down Bank of America (In the end the emails, published at bankofamericasuck.com and here, turned out to be something of a damp squib. Dating from November 2010, the emails suggest that employees of  Balboa Insurance Group, a subsidiary of Bank of America, removed documents from loan files relating to a group of insured properties).

WikiLeaks though, has mostly made a name for itself in exposing political controversies. People don’t predominantly think of it as the place to go to find out about corporate wrongdoing, and corporate disclosures on the site run the risk of being drowned out by the drone of government abuse.

One organization that does specialize in corporate disclosure isAnonymous Analytics, whose focus is on ”acquiring information through unconventional means” (a.k.a. hacking and subterfuge) and presenting it in the form of investment analysis reports. The group, whose stated aim is to “provide the public with investigative reports exposing corrupt companies” and whose team includes “analysts, forensic accountants, statisticians, computer experts, and lawyers from various jurisdictions and backgrounds” caused a stir last September when it exposed alleged large-scale fraud at Chaoda Modern Agriculture, a Hong Kong-listed company. Anonymous Analytics claimed that Chaoda was:-

“overstating its cash balance, exaggerating its revenue, and falsifying its financial statements.”

Last week Anonymous Analytics initiated coverage of another Hong Kong-listed company Huaboa International. In a 44-page report entitled “Smoke and Mirrors”, it alleged Huabao overpaid for several companies acquired from its chairwoman, Chu Lam Yiu. The research note also questioned the veracity of Huabao’s financial statement and performance data. The report stated that:-

“We believe management is materially overstating Huabao’s earning power … [Huaboa International] is a pump and dump scheme with the primary objective of enriching its chairwoman.”

While Anonymous Analystics specializes in ‘primary research’, it also briefly offered a dropbox facility for would-be whistleblowers. This was recently closed down. The offshoot of the hacker group claimed this was because it had been unable to handle the volume of tips, comments and emails it had received.

Organisations such Anonymous Analytics are firmly focused on overt cases of corporate fraud and headline-grabbing controversies. Nevertheless, while having channels to expose criminality is important, there are many other equally valid reasons to create a financial leaks site.

WikiLeaks’s release of the US Embassy Cables, which commenced in November 2010, didn’t provide much sensational news, but it did provide a rare window into the normally opaque worlds of diplomacy and espionage and the conflict between the State department and more nefarious arms of the US state. It will be an invaluable resource for academic researchers and journalists for years to come. But there are few, if any, such open windows into the financial sector.

The Safe Deposit Box: A Tool for Transparency

This, coupled with the inadequacy of most financial regulators around the world, is why a specialised financial leak site is so badly needed.

Here’s my back-of-the-envelope sketch for the Safe Deposit Box, a site that would improve transparency in financial institutions (including banks, insurers, funds, brokers) and commodity trading outfits, by providing a channel that would encourage internal leaks. It could be curated by individuals with financial expertise, such that information leaked could be vetted for accuracy and presented correctly (something that non-specialist leak sites would be unable to do). The site could be split into two main divisions with different purposes:

• A whistleblowing section to allow employees of banks and other financial institutions to expose dubious behaviour, including instances of financial crime, market manipulation, insider trading, ‘creative’ accounting and rogue trading.
• A transparency initiative focused on shedding light on the inner workings of financial institutions. This section would encourage employees to contribute information such as organisational structures, divisional strategies, risk exposures, compensation, and other information that helps to break the near impenetrable wall of secrecy (omertà) large financial institutions frequently enjoy.

Many people intuitively understand the value of division one, but division two is perhaps harder to justify. What’s the point of transparency for transparency’s sake, some might ask? I would argue that banks and other financial institutions still enjoy huge political clout (and indeed some are owned by the public), yet citizens have virtually no insight into their inner workings and strategies,  including who they are lending to, how they treat distressed assets, or their level of speculation on energy and food prices. (see “Barclays shame award“)

For example, I suspect that the residents of Chicago do not have the faintest idea of how a Morgan Stanley consortium came to own the city’s parking meters. I also suspect the residents of Edinburgh have no idea how a RBS consortium came to own the city’s main hospital, the Edinburgh Royal Infirmary.

At a systemic level, the very opacity of financial transactions increases systemic risk, which in turn has a massive impact broader society. Providing a channel for financial employees to shed light on their organisations would have: (1) a democratic empowerment benefit and (2) A research and regulation benefit, providing more material for citizens, academics and regulators to understand and monitor the financial sector.

The transparency initiative could be split into specific research domains that are of particular concern (or ought to be) to journalists, researchers, campaigners, regulators, and even some politicians. For example, domains could include:

• A high-pay transparency programme to gather leaked payrolls, compensation reports and other material to help in monitoring financial incentive systems.
• A tax haven programme to gather lists of subsidiaries, offshore transactions and other material to help shed light on tax avoidance systems.
• A loan transparency programme to gather information on loan portfolios of the banks’ corporate banking divisions, thereby helping keep tabs on socially and environmentally irresponsible lending
• A programme gathering information on banks’ dealings with Polically Exposed Persons (including deposed dictators and their families), authoritarian regimes, and dodgy individuals
• A systemic risk programme gathering info on prop trading levels, interbank risk exposures, and shadow banking systems
• A programme collecting information on ‘mis-selling’ and poor customer service (aka. treating clients as muppets)

I don’t want to be flippant. I also accept that actively encouraging breaches of confidentiality might border on being illegal. Yet confidentiality and non-disclosure agreements are often used by banks to bury frauds and other issues of concern, whose victims are often outside the institution that perpetrates them.

For example, in my research into the potentially damaging effects of commodity speculation, I hit a brick wall when seeking to establish how much banks earn from their agricultural commodity trading desks. They simply don’t report it, and stonewall all requests for information.

I recognise that that leak sites are far from perfect mechanisms and that innumerable issues would have to be overcome before a site along the lines I describe could be launched.

These would include how it would be structured and who would be permitted to access the information. Would it be better to use a centralised WikiLeaks structure, or something more decentralised along the lines OpenLeaks (set up by Wikileaks defectors, but yet to launch)? Might it be better to consider something more conciliatory and collaborative, more like Wikipedia, a financial commons that would allow people with financial expertise to freely and anonymously contribute?

What I do know though, is that financial secrecy benefits a very small section of society, but harms a very large section of society, and I’m also sure that there are a great many financial workers who would love the opportunity to spread the love by spreading the knowledge. There again, there’s always the risk that such a site might also attract the attention of the financial blockade.

The original version of this article was headlined The Safe Deposit Box: Creating a Financial Wikileaks. Written by Brett Scott, who operates as a consultant bridging the gap between finance and those involved in socio-environmental justice and international development. He has also written for the Guardian, the Ecologist, New Internationalist and Open Democracy. Brett blogs at www.suitpossum.blogspot.com and tweets as @Suitpossum. He is a fellow of the WWF/ICAEW Finance Innovation Lab.