Dividends of Crime

Good news of the week: the Serious Fraud Office has grown some teeth. For the first time, they’ve confiscated dividends paid out by a fraudulant company.

This has been possible for many years — the Proceeds of Crime Act enables confiscation of money earned through criminal behaviour, even if it has since changed hands.

And it makes complete moral sense. Investing in a company means (partially) owning it, which means being responsible for its behaviour.

The FT has some charmingly outraged reactions from the City. The Efficient Markets Hypothesis goes straight out of the window, the moment inefficiency is bad for financial institutions.
And so they fall back to the last front of financial scaremongering: pension-fund FUD. “Intellectually it’s unassailable“, says one barrister, “but if it happened on a large scale it could undermine people’s pension funds“.

Nonsense. Nobody argues you should fund your retirement by mugging old ladies. So why should you be entitled to fund it by investing in Muggers, Inc?

Besides, investors — especially huge pension funds — have a duty to investigate the companies in which they invest. Otherwise, you have to assume they’re defrauding not just their customers, but also the shareholders.

Besides, isn’t this why we have markets? To distribute risk? Presumably some innovative broker could concoct a scheme “Proceeds of Crime Insurance”, and allow those poor pension funds to protect themselves.

Actually, I’d love for this to happen more than it already does. The price of fraud insurance would be a public indicator of how corrupt investors believe a company to be. It might even make public some of the due-diligence work done in parallel and in secret by analysts.

To some extent this already happens with, for instance, Directors and Officers Liability Insurance or Fidelity Bonds. It would surely only take the smallest of tweaks to make these explicitly cover the proceeds of crime.

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