Scandals show urgent need for bank reform
Filed under - Financial markets
Corruption and the financial sector
From manipulating rates to mis-selling products and lax enforcement of money-laundering controls, the scandals in the financial sector show the urgent need not only for reform of the regulatory system, but also for an overhaul of how these institutions operate.
So far, a handful of banks – including Barclays, HSBC and Coutts – have been fined more than US$500 million in the past 12 months for misconduct. This sounds impressive until it’s compared to the US$8.5 trillion in assets that just five leading banks held at the end of 2011, or the half-year profits reported this year. Although banks under scrutiny are putting aside funds to take care of fines and possible law suits, Barclays Bank and HSBC alone reported more than US$17 billion in pre-tax profits for the first six months of this year.
Corruption and a tolerance for unethical behaviour are at the root of the illegal activities that have damaged the livelihoods of millions of people and the reputation of the financial industry as a whole. This has to change.
In our history of fighting corruption in government and the private sector over nearly two decades, Transparency International has established key guidelines for building a strong anti-corruption ethos. Zero tolerance for corruption; transparency; and appropriate incentives and sanctions form the cornerstones of good governance.
Zero tolerance for corruption
If those in charge try to cover up corruption, as was alleged at Wal-Mart, what message does that send to the rest of the organisation?
Transparency and accountability
Corruption is always a risk for multinationals operating in many jurisdictions. But by adopting greater corporate transparency – that is, by publicly reporting on activities and operations and anti-corruption programmes – companies not only provide third parties with a way to hold them to account but also send a message to their employees and supply chains that they do not tolerate corruption.
In July 2012 Transparency International published Transparency in Corporate Reporting. The report assessed 105 of the world’s largest companies on three areas of transparency: reporting on anti-corruption programmes, organisational transparency and country-by-country reporting. Good reporting is an indication of a commitment to fighting corruption and makes wrongdoing easier to uncover.
Financial institutions scored badly overall and particularly badly on their country-by-country reporting, which, given the news in the past five years should not come as a great shock. Financial firms scored an average 56 per cent on how they report on anti-corruption programmes, well below the 68 per cent average. And among the financial companies scoring in the top ten for organisational transparency, there was not a single US firm.
Incentives and sanctions
Regulations need to be strong and unambiguous. There need to be incentives for sticking to the rules and sanctions for violating them. And there should be clear policies to avoid conflict of interest, including measures to slow down the revolving door whereby industry insiders become regulators and vice-versa, and to monitor scenarios where they do.
When Barclays Bank was fined for manipulating a key interest rate, Transparency International chair Huguette Labelle argued that strong leadership is a prerequisite for building back trust in institutions, and that regulators should take this opportunity to institute tough reforms in banking to stop the rot.
Less than a week later the US Senate’s permanent subcommittee on investigations released a 340-page report detailing the lapses in the compliance procedures at HSBC – one of the world’s biggest banks – in its Mexican operations, which allegedly made laundering money from drug cartels a serious likelihood.
HSBC had bought the Mexican bank in 2002 to increase its presence in the market, a legitimate business decision. However, the report found “HSBC Group was fully aware of the years-long … compliance problems at HBMX [the Mexican operation] …. The evidence also indicates that HSBC Group executives and compliance personnel worked to build a compliance culture, but repeatedly faced a workforce in Mexico that disregarded the Group’s AML [anti-money laundering] policies and procedures, delayed obtaining required KYC [know your customer] data, delayed closing suspect accounts, and delayed reporting suspicious activity to regulators.”
Eight years on HSBC faces substantial reputational risk and US$27.5 million in fines in Mexico with the US Justice Department still deliberating what sanctions to impose. This follows fines totalling more than US$11 million in December 2011 for mis-selling financial products.
In our work to push for rapid enforcement of the G20 Anti-Corruption Action Plan we hammer home the need for better regulations and more independent regulators. How many more scandals affecting people’s livelihoods will it take for governments to fully embrace this agenda?
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