How the USA can make bankers feel like Guantanamo Bay

David Bermingham was another recent guest at the Financial Services Club. 

David was one of the NatWest Three, the three bankers who worked for NatWest in the 1990s and got caught up in the Enron scandal.

What happened and how come David ended up in an American jail when he's a British citizen?

Well, after presenting at the Club, I interviewed David to capture his story.

Here it is ...

Q: What’s the background to what happened to you and your colleagues?

Well, it all started about 12 years ago in 2000, when the
Royal Bank of Scotland was bidding to takeover NatWest.  The three of us who are now known as the
‘NatWest Three’  – myself, Giles Darby and Gary Mulgrew – were
working for a division of the bank called Greenwich NatWest. 

One of our biggest clients whilst we worked for Greenwich
NatWest was Enron, and we chose to make a personal investment with Andrew
Fastow, who was then the Chief Financial Officer at
Enron.  He’s now the poster child for
corporate crime in America obviously. 

We did this on the basis that we would be leaving Greenwich
NatWest, and made a decision not to inform Greenwich NatWest that we had been
given the opportunity to make this investment. 
With the gift of hindsight, that was a catastrophically poor piece of
decision-making.

About eighteen months later, things were looking bad for
Enron.  They had not filed for bankruptcy
at this stage, but had filed an 8K with the SEC, restating their accounts, and
right at the bottom of this there were a couple of paragraphs that appeared to
be about the investment vehicle we had been involved in. 

These paragraphs gave us cause for concern that there had
been insider dealing at Enron, so we went straight to the Financial Services
Authority and said, “this looks like a
case of insider dealing at Enron”.

We had a lengthy interview with the regulator and left them
with hundreds of pages of documentary evidence of everything that we had done. 

They said: “thanks
very much for giving us this information, we need to look into what has
happened and we will come back to you”.

Sure enough, a few months later, they called us back and
said that they had conducted their enquiries and that they had not found that
we had done anything wrong.  However,
they also felt the SEC should be aware of the information and asked if we would
have any problem if we passed it over to the US authorities.  We said, “no, of course not as that’s why we
came to you with the information as you are our regulator”.

This was in March 2002, by which time Enron had (a) filed
for bankruptcy and (b) had become a criminal investigation.  That had happened in January 2002.

So we sat around waiting for someone to call us from
America, and the call never came.

Then one morning in June 2002, we woke up to find ourselves
on breakfast news being accused of fraud and, more bizarrely, accused of trying
to defraud NatWest in London.

That was the start of a very long and very painful journey
that eventually resulted in our extradition to the USA.  This would not have been the case if it were
not for the government bringing in a new extradition law that enabled a whole
host of countries, including but not limited to America, to request the
extradition of people without the need to support the request for extradition
with evidence.

That change of law happened in January 2004 and, within a
month of that law change, the US had requested our extradition.  Then began our long and very painful fight
against not only our extradition, but also what we perceived to be a very bad
piece of law. 

We lost that fight in July 2006, when we were extradited to
Texas and spent eighteen months there trying to prepare for trail.

We eventually realised that we would be spending a lot more
time there, unless we agreed to sign some papers that resulted in our being
sentenced to thirty-seven months imprisonment. 

This meant that we could be repatriated under the terms of
our deal back from the US to a UK prison at the end of 2008, and we then spent
a year in prison over here before finally being released at the beginning of
2010.

Q: Hearing what you
have just said, if the UK regulator thought everything was above board, how
come the Americans didn’t?

Well, there’s a number of ways to answer that.  Specific to our case is that we were seen as
the useful idiots by the Department of Justice. 
Bear in mind, there was a huge investigation taking place into what had
happened at Enron and, by and large, the prosecutors were not getting very
far.  This is not my observation but
something the prosecutors themselves have testified to.  They needed some way to break the deadlock in
their investigation as, when the balloon goes up in America, everyone reaches
for their lawyer and their lawyer says, ‘tell them nothing’.  This is because information is not freely
given in such cases, but traded on the basis of value and never willingly
offered or given.  So the lawyers had a
whole bunch of transactions they did not understand, and were not getting
anywhere but had a lot of heat on them to make some indictments.  So what they chose to do was to use us as the
lever to get to people higher up the chain. 
They used the charges against us, for example, to get to a guy called
Michael Kopper ...

... who, the day literally that the charges
against us were filed, had his lawyer pick up the phone to the prosecutors to
say that he was ready to talk.  He then
gave evidence against Andy Fastow. 
Fastow eventually agreed to enter into a plea bargain and gave them
evidence against Skilling (the then CEO) and Lay (founder and Chairman of
Enron).  So they worked their way up the
corporate ladder.  They call it peeling
the onion over there.  You start at the
bottom with the useful idiots, and work your way up and we were very useful to
them for that.

Q: You were the
easy fall guys?

Yes, we were the easy fall guys, because we were the means
of getting to Kopper as the transaction in which we were involved had resulted
in both Kopper and Fastow making a lot of money personally.  It was therefore easy to use that as a means
of getting to them, and it worked.  Looking
at that from a purely objective perspective, you can see exactly why they did
what they did.  By the same token, it is
possible to construct a misdemeanour or offence of walking on the cracks of the
pavement in America.  If you want to call
something a crime, you can find a way of doing it.  In answer therefore to your specific question
about the Financial Services Authority (FSA) saying we had done nothing wrong;
when we entered into a plea bargain at the end of 2007, I can sit here now and
honestly say to you that every single word of that plea agreement is true.  In terms of the facts of what we did, it is
completely accurate and true.  It happens
to be exactly the same as what we had told the FSA six years earlier, which
they felt gave no cause to sanction us, let alone charge us with criminal
activity.  It is purely that, under US
law, it is capable of being construed as a crime.   It’s purely a matter of interpretation and
the way in which the authorities want to use the context for their own means
and purposes. 

Q: Well then I don’t
understand how, if I were doing what you were doing, that I could fall foul of
the US law as I am a British worker working for a British firm based in
Britain.

Yes.  You would be
horribly mistaken if that were your view, although of course it is the view
held by many.  It is a terrifying fact that
there are an awful lot of people working here in London who may never set foot
on US soil, who may never have any genuine dealings with the US, but who are
nevertheless - unknown to them - absolutely subject to US jurisdiction.  To put it at its finest: the wire fraud
statutes in America mean that if any single email passes through an American
server or a single wire transaction is denominated in dollars or a fax is sent
to the US, then the mere act of sending that electronic communication to the US
is enough for them to claim jurisdiction. 

Any then alleged conspiracy or suspicious act in which that
fax, wire or email could play a part, is covered by US jurisdiction and could
result in a request for your extradition without evidence. 

Q: That’s pretty
scary, as what you’re saying is that if I deal with Visa, MasterCard, PayPal or
any other firm that processes my transactions through American soil, and then I
could be extradited as were you.

Absolutely.   Any
transaction conducted in dollars would be covered for example, and there are a
lot of people here in London doing dollar transactions all day long.  Maybe they are a fund. Maybe they do dollar
transactions for their clients.  As far
as they are concerned, it’s all happening in London but of course it is
not.  The fact that these are dollar
transactions means that they are going to be cleared at some point through the
US, and then you are open to their statutes and laws.  That means that the mere fact that you are
conducting a transaction in dollars, even though your client has nothing to do
with the US and even if you have never set foot in the US, does not
matter.  The fact that the transaction
took place in dollars means that the US has jurisdiction over it.

Q: So if I take the
example that firms like Nordea and DBS have pulled out of US territory to
avoid the burden of US regulations, they’re still subject to US laws regardless
and the dollar is the reserve currency of the world, so tough.

Yes.  I mean if you
pull out of the USA physically and have no US operations that may remove one
layer of risk.  It does not mean that you
escape the jurisdiction of the USA.

Q: In this context
then, if you have exposure in the USA, what is the best way to protect your
business, your staff and your operations from exposures?

Well, prevention is better than cure and you need to ensure
that you are doing everything you need to do with compliance.   Even then, there are differences of opinion
when it comes to interpretation.  Take
the recent cases of Standard Chartered and HSBC, there are clear differences of opinion
as to the nature and scale of any wrongdoing. 
Banks may take a view that they have done exactly what is required
within the spirit of the law, but the US authorities may disagree.

So being on top of your compliance is the most critical
factor. 

Then, if the balloon goes up and you have a problem with the
authorities, you are in crisis mode and looking for damage limitation.  There are very few firms that come up against
the US regulators or Department of Justice and come away unscathed.

Q: Well, if you take
the example of StanChart, Peter Sands put up the defence that you can have
transactions from people who are naturalised US citizens but Iranian-born for
example.   The question then is how can
you ensure that that person, who looks completely bona fide, is not doing
something that undermines US laws on money laundering?

Well it’s a difficult line to walk.  I’ve had many conversations with many
compliance officers who ask: how the hell, in practice, are we expected to
police this?  The answer is, in practical
terms, you do the best you can.  There is
a school of thought that, in these strained economic times, some US regulators
and prosecutors will come after any foreign institutions, but particularly
foreign banks as that is where the money is. 
The objective is to extort money from these institutions, under threat
of closure or lawsuits, as it is (a) good for the US economy and (b) good for
the individual who brings such charges, and their political aspirations.

Q: But it’s not good
for the Americans overseas relations.

Sure, but in these economic times, Benjamin Lawsky is a
great example of a personal-cum-political publicity stunt.  Time will tell how that works out but,  if you are a prosecutor or someone in
enforcement, it’s good for you if you can take money from foreign firms and
look like a strong regulator.  And most
foreign firms will pay up because they cannot avoid keeping their American
interests alive because of the dominance of that economy.

Q: That’s only true
whilst America is the world’s largest economy however. 

Yes, which they are today. 
That gives them extraordinary territorial reach, far more than any other
economy.  For example, the Bribery Act of
2010 is the biggest piece of legislation we have ever introduced over here, but it’s
highly unlikely that we will see this ever being actively used in practice to
gain reach over borders outside our own. 
Conversely, the US does this on a highly regular basis.

Q: So, if I summarise,
your advice is that you will have to deal with US territories but look after
your staff, comply as far as you can and, if you get into a crisis moment, lock
it down as fast as possible and pay the price to walk on by.

Yes.

Q: What has this
experience meant to you personally?

Well, it was a horrible few years, I can’t pretend
otherwise, particularly for my family. 
By the same token, and it sounds very clichéd, it’s made me a better
person.  I have a completely different
outlook on life now and have met people from all walks of life that I would
never have met otherwise.  From
politicians on the one hand to other people involved in the same sort of issues
on the other, to people in prison.  

All politicians and lawmakers should spend
at least six months behind bars, just to understand what it feels like when the
gate closes behind you.  

Q: And what are you
doing now?

As part of my rehabilitation process, I’ve been helping a
lot of individuals involved in US extradition, mainly hand holding and giving
them the human perspective of what it means and what happened to me when I went
through this.  I wrote a book about our
experiences which is probably never going to trouble the bestsellers list but
has been very well reviewed, and I would like to think that in some small way
it has contributed to the on-going campaign for extradition law change.  

And I’ve established a consultancy www.dbsc.co.uk that
specialises in helping major companies to get front office staff engaged in
compliance because of how it can impact them personally if they get it
wrong.  It’s about the ethics and process
and what they need to be aware of. 
Operational risk is frequently dealt with in terms of processes and
box-ticking, but most often the problem lies with individual actions.  What is needed is radical culture change, and
I’m happy to hold myself as an exemplar of why ethics and compliance are so
important to everyone these days, because of the environment in which we live
and work.

Q: final
question.  Some people may say this was
your own stupid fault.  What do you say
back?

To a degree they would be right.  We made mistakes and a very poor judgement
call that means that to a certain extent we were the architects of our
demise.  But it’s important to see our
actions in the context of the time, 12 years ago, and we could never possibly
have foreseen how it would have turned out, and so you can see it whichever way
you want.  Hindsight is a wonderful thing
– the key is to be able to learn from your mistakes.