Driven by high regulatory requirements and expectations, scandals that have become public, expensive investigations as well as the underlying reputational risks, financial institutions have been investing heavily into their anti-money laundering setups. But are the most common measures, such as investments in technology, human capital and internal control systems sufficient? Not really.
People are at the center of it all
Nearly all cases of money laundering scandals and misconduct have one thing in common: it is usually individuals or a group of individuals who failed in their function, or at least did not act as resolutely as they should have. In most cases, the likely motivation is the sales culture of the institute on which targets and ultimately monetary compensation are based. No one is denying that a financial institution must make money in order to remain in the market. What is more difficult is the decision whether or not to offer banking services to existing or potential clients with a high risk profile. The conflict of interests between economical and regulatory aspects is obvious: let’s call it risk appetite.
Everything holds up on paper
These days, many companies like to point to their internal code of conduct, the moral and ethical compass of a company. In many cases, it can even be accessed on a financial institution’s website. But let’s be honest: this document alone will hardly be sufficient to achieve the aspired attitude, corporate culture and behavior of employees and management. Certain measures, such as an increase in staff in the second line, better qualifications or improved infrastructure (systems, technologies, processes and controls) are necessary to effectively combat money-laundering, but in the very end, success in this endeavor depends on the attitude and behavior of each individual.
“Tone at the top” as an important component for strong compliance
The Board of Directors and Management must be role models when it comes to corporate culture and integrity, ideally they should live this in reflection of the company’s business strategy.
What kind of corporate attitude is essential for an overall consistent and efficient compliance?
Percentages and statements relate to responses to KPMG’s Financial Crime in Banking Survey 2018
How can a sound compliance culture and an appropriate management style be incorporated into the daily business?
Ideally, the following points are complied with:
- The Board of Directors must clearly and transparently communicate corporate culture and expected behavior and document it accordingly. It need to deal with this important topic on a regular basis and significant cases of non-compliance should be brought to its attention. The framework needs to be assessed regularly including adjustments where necessary.
- Management, on the other hand, is asked to implement these rules in daily business and to make sure that the rules are adhered to.
- The Compliance function should have sufficient clout to represent and enforce compliance topics. One way of making this possible is that the Head of Compliance is a member of the executive board. This sends a strong signal internally and externally.
- Compliance together with the Front Office should come up with as objective criteria as possible, according to which misdemeanors and misconduct regarding the compliance with anti-money laundering rules will be punished. Just as important is the recurring training of staff members and line managers.
- All employees and management must know and understand the criteria according to which misconduct is punished and what disciplinary actions they should expect in such a case.
- Middle Office, together with the Compliance function and the Front Office, should create a transparent information base (management information) for the relevant stakeholders. Transparency helps to attain the desired behavior.
- Line managers need to integrate the developed and agreed-upon criteria in the performance appraisal process, supported by the human resources department. Moreover, the performance appraisal process should have a consistent approach so that any misconduct will influence monetary compensation and/or promotions accordingly. Important to note that a consistent approach is applied for all individuals concerned.
- An (external) whistle-blowing hotline may aid in reporting possible misconduct anonymously. What is important in this regard is that internally, whistle-blower cases are governed by uniform rules; ideally they should be processed by an independent function.
So what’s the benefit?
Having a clear and transparent disciplinary framework can help reduce misconduct in the area of money laundering at all functional levels. Behavior can be adjusted to be in line with the company’s risk appetite with the help of targeted management and disciplinary interventions. Implementing a system with bonuses and penalties has recently yielded quite good results and promoted compliant behavior.
Zero tolerance culture?
A good compliance culture and an appropriate management style are important but not in themselves sufficient to prevent financial crime. Enforcing disciplinary action against employees who fail to comply is also crucial.
In the event of misconduct, however, the question arises as to how harsh the penalty should be for the affected employee or manager. Often errors are committed without bad intentions and if there is a zero tolerance policy in place, this could lead to the obfuscation of mistakes and breaches (for as long as possible). When assessing the severity, criteria such as seniority, responsibility, intent or recurrence should be considered. What is of the utmost importance is that every individual case is assessed consistently and thoroughly and on the basis of well-researched facts. Staff and line managers must understand the company’s will and power to enforce possible disciplinary actions or sanctions. Applying a zero tolerance culture is not helpful to achieve compliant behavior, but will weaken already established structures and culture.
Financial institutions should be able to answer the following questions surrounding corporate culture, integrity and behavior by staff and managers in the area of money laundering:
- How is our incentive, bonus and promotion system designed? Does it offer incentives to engage in non-compliant behavior?
- Is there an established mechanism, known and understood by staff and management, which sets out the handling of misconducts and disciplinary actions?
- Are the Board of Directors and Management communicating the right signals and expectations or is everything focused solely on profitability?
- Do all employees understand the disciplinary process?
- Is there sufficient transparency to inform stakeholders (Board of Directors, management, Compliance, HR) on events and cases of misconduct?
- Do possible disciplinary actions have the necessary punching power (monetary losses or lack of promotion)?
- Do performance targets and processes address compliant behavior?
- Does senior management follow the compliance rules and is the Board of Directors reviewing the framework on a regular basis?
- Does the Compliance function has the necessary competences to act accordingly?
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