Anti-corruption challenges for the financial sector - Philippe Montigny

Recently, I was privileged to make a presentation to the European Institute of Financial Regulation (EIFR). During the discussions, there was a lively exchange amongst banking professionals on the stakes involved vis-à-vis corruption risk specific to the financial sector.

More and more financial institutions have been prosecuted for corruption in recent years.

Until recently, most convictions for acts of corruption have been limited to companies. Now, however, a number of financial institutions have joined the ranks with convictions by either the SFO or the SEC. In several cases, it was the authorities themselves who discovered the accounting irregularities, which ultimately led to the discovery of acts of corruption.

In 2015, five executives from an American brokerage firm were sentenced to a combined total of 15 years in prison for acts of corruption committed in Venezuela. Similarly, three executives from a British investment fund were sentenced to a combined total of 28 years in prison by the SFO for acts of corruption committed during a business scheme in Cambodia.

In financial institutions, compliance is too often limited to anti-money laundering and not enough attention is paid to the risks of corruption.

The authorities have imposed heavy anti-money laundering processes on financial institutions and, more recently, increasingly complex obligations to avoid the inadvertent financing of terrorism or dealing with countries under embargo. The monitoring of these comprehensive measures is intensive and takes up a large part of the bank’s resources dedicated to compliance.

However, financial institutions have commercial operations to undertake, particularly with public banks or sovereign wealth funds where the risk of corruption of a public official is significant. It is thus just as important for a bank to implement effective anti-corruption compliance processes as part of its overall compliance program as it is for any other commercial enterprise.

Anti-corruption compliance programs thoroughly integrated and implemented throughout the company are an effective corporate defense.

Over the past ten years, many companies have equipped themselves with anti-corruption compliance programs whose efficacy has been proven repeatedly. Using the best practices demonstrated by these companies certain national authorities (Italian, American, British, Russian and - more recently - French, Spanish and Brazilian) have published corporate guidelines, which are now the reference.

One of the most renowned cases of best practices is that of Morgan Stanley. Following the discovery that an employee had committed an act of corruption Morgan Stanley was still able to escape prosecution and benefit from a non-prosecution agreement with the American authorities because of the outstanding quality of its anti-corruption compliance program.

The imminent publication of ISO 37001 (anti-bribery management standard), whose requirements will be incorporated into the ETHIC Intelligence terms of reference, is encouraging more and more financial institutions to seek certification of their compliance programs.

Authorities also expect banks to be vigilant vis-à-vis their clients and potential corruption risks.

Banks have two reasons for vigilance concerning client-related corruption risk.

The first is directly related to their obligation to avoid money laundering. There is always an element of money laundering associated with any act of corruption. An insufficient amount of attention to this issue could lead some to view the bank as complicit in the act on the one hand and negligent regarding its monitoring of cash flows on the other.

The second reason is linked to the impact that a prosecution and conviction could have on the economic health of any business. Many of the companies who’ve been sanctioned heavily following accusations of corruption - and especially those which were assigned a corporate monitor – are currently among the strongest economic players in their field as their turnover is now based exclusively on innovation and competitiveness and not corruption. And while this is true, it cannot be ignored that when the allegations first surfaced and the investigation began, each business experienced a certain level of financial instability while awaiting the outcome.

It is safe to assume that the coming years will see a marked increase in the implementation of anti-corruption compliance programs by financial institutions. These will undoubtedly apply to both their own operations as well as to those of the companies whose assets they manage. ETHIC Intelligence certified its first financial institution in 2015 when it certified the anti-corruption compliance program of Slovenian bank, DUTB.  It is probable that more and more banks will require detailed information on any potential client’s anti-corruption compliance program including whether it has received anti-corruption certification.