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.
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.
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.
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.
Ideally, the following points are complied with:
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.
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: