Improving corporate ethical practices in banks

FT ONLINE

Financial crime is not a new phenomenon in the banking world. In both developed and developing economies such crimes are generally committed by bank's staff, customers and others. These include key stakeholders like the bank board, employees, clients, organised crime groups or influential sections and persons with whom banks have business dealings.

Nowadays, such crime is being committed in a more sophisticated way and the criminals are using innovative techniques.

Alongside big banks, small banks are easy prey for criminals, as many lack robust systems to fend off threats. Given the dynamism in the approach of financial crimes, it became a critical challenge for banks to catch up with the development. If the perpetrators get advantage of the bad management of a bank in terms of ethical corporate practices and culture, the risks become even higher.

Employees should have very limited scope and fortitude to undertake unethical practices in an environment with integrity and strong ethical culture. This is particularly essential in a banking environment where the agents manage assets and representatives of a small section of financial contributors guide and influence management decisions.

In recent time, the call for creating ethical environment is lauded globally as a measure to address financial crime in the banking industry. Though ethical practices have always come up as one of the crucial factors to address fraudulent activities, probably for the first time, the stakeholders are associating financial frauds and crimes with the unethical behaviours of banks. They are now raising voice for improving corporate ethical practices in banks.

Unethical activities violate the moral standards of society and affect customers, with the colleagues, and with other stakeholders. Unethical behaviour towards colleagues involves behaviours such as sexual harassment, discrimination, not respecting employees' privacy, or violating wage, overtime or benefit rules. Unethical behaviour towards the organisation includes behaviours like stealing or misappropriating assets, misusing confidential or proprietary information, or falsifying/ manipulating financial reporting information.

However, the line between ethical and unethical behaviour is not always easy to draw, and the task is even more difficult if we take into account the differences in moral standards in different societies and cultures. It is very crucial to understand, under what circumstances unethical behaviour at the workplace is more likely to occur. Usually one would think that unethical behaviour occurs because there are people with low moral values who see an opportunity due to a lack of proper internal controls. However, the published research activities have shown that the possibilities of unethical behaviour at the workplace is influenced by two critical factors - employees' work relations and colleagues' behaviour.

Global evidences reveal that the frequency of unethical behaviour at the workplace is increasing. The Association of Certified Fraud Examiners (ACFE) regularly publishes reports about occupational fraud and abuse; the recent report noted, a typical organisation loses 5.0 per cent of its revenues to fraud each year; most occupational fraudsters are first-time offenders; the victim organisations decided not to refer their fraud cases to law enforcement, with fear of bad publicity being the most-cited reason; over 8.0 per cent of the victim organisations were fined as a result of the fraud. Unfortunately, only a small fraction of cases of unethical behaviour eventually is brought to (criminal) court; and many incidents are probably never detected, or at least not detected officially by a person in charge of addressing and investigating unethical behaviour.

In the context of banks, ethics are commonly conceptualised by trust, efficiency, openness, transparency and accountability, development and community involvement. Cooperative behaviour promotes trust. Morals in banking operations require integrity on the part of owners and directors, senior management as well as junior officers dealing directly with depositors and borrowers. Accordingly, integrity in banking operations requires integrity on the part of owners and directors, senior management as well as junior officers dealing directly with depositors and borrowers. 

It is recognised that trust and morals in banking are clearly linked to the ethical practices. Codes of ethics have been one of the primary policy responses to large scale acts of corporate crime. In the context of banks, ethical standards may be expressed in a company's formal conduct requirements, or contained in generally stated principles that guide a company's preferred conduct or behaviour.

In the banking industry, the code of ethics is implemented for employees and as a whole for the bank management. For the management, standards and ethical codes in banking industry are commonly directed by the regulator through fair practice code taking care of the interest of stakeholders, disclosures and customers' right. It is important to have ethical behaviour in governance which goes far beyond company law or banking laws.

There are evidences that financial crime or scams in banks and financial institutions are on rise, and many of these are associated with ethical behaviour and culture. The shapes and forms of financial crimes as well as their degree of severity have transformed over the years, partly due to the increasingly globalised/borderless financial systems coupled with new technologies. The financial crimes can be segregated into different forms from different dimensions. Financial scams are amongst the common news in the media, which publishes or broadcasts reports about bank scams regularly.

High volume of non-performing loans is a key concern in the banking sector and this is linked with asset misappropriation. Though not always, in many instances these are the outcomes of financial frauds or crimes. Sometimes, it is not easy to identify the willful defaulters from the defaulters with genuine reasons. Thus, in most instances, the stakeholders do not term these as financial crimes, and generally willful default is not regarded as a criminal offence. However, the situation is changing now, and there is a growing demand to term willful default as a criminal act, and serious efforts are on to frame stringent regulation to handle this financial crime to save banking and financial sector. 

In regard to the interrelations of ethics and financial crime in banks, ethics is related to all types of crimes in banks and financial crimes are clear examples of ethical lapses, but all ethical lapses are not crimes. The current state of banking ethics, the enormous size of banks and the banks' inability to detect real-time fraud - all contribute to the ongoing failures in preventing serious banking crimes. The president of New York Fed, William Dudley, in 2013, acknowledged that 'the deep-seated cultural and ethical failures at many large financial institutions' had been a result of the growing size and complexity of banking structures, as well as a result of bad incentives. Some recent banking scandals underscored why a structural reform of the banking system is urgently needed and corporate ethics should get due emphasis.

• Dr. Shah Md Ahsan Habib {Professor and Director (Training) of BIBM}