• Uncategorized

Financial Institutions and the Glaring Absence of an Ethical Culture

Federal prosecutors and regulators have been active in tackling US banks.  In the last few weeks, the Federal Reserve took the extraordinary step of blocking Wells Fargo’s ability to grow its business until it improves its corporate governance and risk and compliance management; and Rabobank and US Bank were punished with six-figure settlements for AML and Bank Secrecy Act violations.

When you review the facts, the years of misconduct, the obstruction of regulatory oversight functions, and the utter failure of corporate boards and senior management to address the glaring deficiencies and law-breaking conduct the root cause is clear.  Laws and regulations were viewed as impediments that needed to be circumvented and even ignored.  Compliance was a nuisance and viewed with disdain.  Resources and integrity were barely existent in these banks.

The question that cries out when you review these enforcement actions is where was the bank’s ethical culture?  Why did no one raise a voice to alert the board and senior management about the ongoing activity?  What tone was really set at the top?

Unfortunately, there is a glaring absence of commitment to an ethical culture.  Financial institutions are in desperate need of a reputational overhaul.  A new commitment to business ethics and overall compliance with the law has to be initiated.

Banks have to start over when it comes to ethics and compliance.  Robust controls that are ignored or circumvented can no longer be tolerated.  Coupled with this commitment to ethics and compliance, bank leadership has to devote more time and attention to compliance.  Federal regulators need to reinforce this message, as they have done over the last ten years.

To reinforce my point about the importance of ethics in the financial industry, when reviewing an enforcement action, especially the three major actions referenced above, consider how the facts may have changed if the bank had a senior ethics and compliance officer who had adequate authority, independence and resources to manage and operate a robust ethics and compliance program.  In addition, imagine if a dedicated CCO was present during key meetings in which financial institutions made decisions that were harmful to the company.

Wells Fargo adopted a sales incentive plan that quickly eroded its sales practices leading to fraud and fake accounts.  Over 5000 employees were fired because of their involvement in these scams or for failing to meet the new incentives.  Whistleblowers were not rewarded; to the contrary, they were fired for raising concerns about the program.

If a Chief Ethics and Compliance Officer was part of the review of Wells Fargo’s new sales incentive program, how do you think the CCO would have reacted?  What issues do you think the CCO would raise?

Financial institutions would do well to consider these issues in the planning stages of any new sales initiative.  A business ethics perspective can provide an early warning notice to business management about the impact and risks of a new initiative.  Banks need to expand their perspective on “risks” beyond the scope of business risks and address compliance risks.  A new product offering may involve significant business risks, and that certainly should be evaluated and analyzed in accordance with the bank’s business risk thresholds.  But just as important is the need to address ethical and compliance risks when considering bank products and services.

Banks are slow to change.  The Federal Reserve and the Comptroller of the Currency have sent a new message to every bank – make sure your board governance structure and procedures are pristine and improve your risk and compliance functions.  If banks fail to do so, the government stands ready to intervene, and we may see more enforcement actions following the Wells Fargo precedent.

You may also like...