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The second of a three-part article titled Ethical culture and financial crime in banks
There are opinions that ethical failures and lapses in banking supervisions are becoming common because the people involved rarely face criminal charges.
Perceptions on regulatory implications for restricting financial crimes and improving ethical practices are changing over time. A recent study on ethical behaviour of individuals indicates that voluntary regulation produced more unethical behaviour compared to conditions of no regulation or full regulation.
In addition to reducing their size and finding new ways to enforce anti-fraud rules, banks should consider encouraging their employees to report incidents of misconducts anonymously. By doing so, banks can detect frauds at an earlier stage, thereby minimising the risks of banking crimes and retaining the trust of public. The tone set by the board and senior management is a key to driving an organisation's crusade against financial crime. Senior bank officials need to set accountability standards, establish policies and controls, and to promote transparency by working closely with regulators. They should provide incentives for promoting compliance, and show zero tolerance toward potential internal and external risks. It is crucial to conduct behaviour change internally and externally (for clients and public) to help shape the right attitude and moral responsibilities towards financial crimes.
To address the financial crime and to promote ethical practices, financial regulators and industry bodies have launched several initiatives to reduce the risk of further misconduct, by launching several reform initiatives and improving accountability and controls. In May 2015, the Future Solution for Business (FSB) launched a misconduct action plan to address these issues through a range of preventative measures, focusing on three aspects. These are; improvements to financial institutions' governance and compensation structures to reduce misconduct risk; improvement to global standards of conduct in the fixed income, commodities and currency markets, including through codes of conduct and through related regulatory and enforcement tools in wholesale markets; reforms to major financial benchmark arrangements to reduce the risks of their manipulation. Indeed, the rationale behind this action plan is based on the conviction that "the use of fines and sanctions acts as a deterrent to misconduct, but preventative approaches are also needed that can mitigate the risk of misconduct through improved market organisation, structure and behaviour of market actors."
Regulatory provisions and institutional setup are crucial to addressing financial crime in the banking and financial sector of any country. Regulatory provisions associated with financial crimes can be associated with different banking activities and services, operations and institutional setup. Especially regulations and set of rules related to the issues of due diligence, internal control and compliance, defaulted credits of different types, risk management process, and money laundering are particularly relevant. As a regulatory and supervisory authority, Bangladesh Bank (BB) has several departments and units that are directly and indirectly associated with handling financial crimes and frauds in the banking sector of the country. Probably anti-money laundering (AML) is the area where most of the financial crime-related regulatory provisions were introduced in recent times.
As the institutional setup, every bank of the country has an internal control and compliance department (ICCD) responsible for overseeing internal audit, monitoring and compliance issues, as required by the rules issued by the BB. Ensuring the operational independence of ICCD and internal audit function is crucial to prevent financial crime in the banks.
Absence of effective internal controls can be very costly for banks as it creates the opportunity of fraudulent activities. Bangladesh Bank has specific guidelines for internal control and compliance of banks. Moreover, risk management guidelines and provision for Customer Due Diligence (CDD) are also related to the prevention of several crime issues. CDD combines the Know Your Customer (KYC) procedure, transaction monitoring based on the information and data or documents collected from reliable and independent sources. In the context of addressing money laundering, the Bangladesh Financial Intelligence Unit (BFIU) guidelines require even stringent KYC requirements.
Government of Bangladesh formulated its National Integrity Strategy (NIS) as a comprehensive good governance strategy to prevent corruption and improve national integrity in all sphere of life in October 2012. The National Integrity Strategy has identified 10 government institutions and six (6) non-government institutions for implementation of its action plans for prevention of corruption and ensuring integrity. The government institutions include parliament, executive and public service, judiciary, election commission, office of the attorney general, office of the comptroller and auditor general, public service commission, ombudsman, anti-corruption commission and local government. Non-government institutions are: political parties, private sector, NGO and civil society, family, educational institutions and media. Subsequently, an NIS unit has been formed at each ministry and a National Integrity Advisory Committee has been formed with the Prime Minister as its chair. The overall purpose of a National Integrity Strategy is to provide a system of governance that creates trust among citizens. The Government has also formed ethics committee in every ministry.
Code of conduct for banks and non-banking financial institutions (NBFIs) has been introduced in November 2017 to implement National Integrity Strategy (NIS) in the financial sector. Instilling integrity, high ethical standards, efficiency and responsibility in the financial sector of the country is the prime objective of introducing this code. According to the circular issued in this respect, all scheduled banks were required to prepare their own code of conduct in line with this code by December 31, 2017. After formulation and completion of all preparation, banks were required to start practising or implementation of their own code of conduct in their day-to-day activities by January 01, 2018 properly and effectively.
This code is applicable for all the persons working in the banks and financial services industry of Bangladesh in the capacity of owner, director, employee, advisor, consultant, supplier and other stakeholders. After implementation of this code, it is mandatory for all the concerned persons to act in an honest, fair and legitimate manner.
Dr. Shah Md Ahsan Habib is Professor and Director (Training) of Bangladesh Institute of Bank Management (BIBM).