Corporate Ethics and Financial Crime : Institutional Setup

April 25, 2020

Corporate Ethics and Financial Crime in Banks: Regulatory Provisions and Institutional Setup

(Published in the Financial Sector in 2018)

Dr. Shah Md Ahsan Habib[1]

Perceptions on regulatory implications for restricting financial crimes and improving ethical practices are changing over time. A recent study, investigating ethical behavior in individuals indicated that voluntary regulation produced more unethical behavior compared to conditions of no regulation or full regulation. This indicates greater relevance and recognition of compliance approach in the financial sector. There are opinions that ethical failures and lapses in banking supervisions are becoming common because the people involved rarely face criminal charges. In addition to reducing their size and finding new ways to enforce anti-fraud rules, banks should consider encouraging their employees to report observed misconducts anonymously. By doing so, banks could detect frauds at an earlier stage, thereby minimizing the costs of banking crimes and retaining the trust of the public. The tone sets by the board and senior management is a key to driv­ing an organization’s crusade against financial crime. Senior bank officials need to set account­ability standards, establish policies and controls, promote transparency by working closely with regulators, provide incentives for promoting com­pliance, and show zero tolerance toward potential internal and external risks. It is crucial to drive behavior change internally and externally (for clients and the public) to help shape the right attitude and moral responsibilities towards financial crimes.

To address the financial crime and 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 FSB launched a misconduct action plan to address these issues through a range of preventative measures, focusing on: One, improvements to financial institutions’ governance and compensation structures to reduce misconduct risk; Two, 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; and Three, 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 organization, structure and behavior of market actors.”

Regulatory provisions and institutional set up are crucial for addressing financial crime in the banking and financial sector of any country. Regulatory provisions associated with financial crimes could be associated with different banking activities and services, operations and institutional set up. 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, 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 AML is the area where most of the financial crime related regulatory provisions were installed in recent time in Bangladesh.

As the institutional set up, every bank of the country has an ICC department 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 for preventing financial crime in the banks. Absence of effective internal controls can be very costly for the bank through inviting erroneous decisions and creating 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 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 State Institutions and 6 Non-state Institutions for implementation of its action plans for prevention of corruption and ensuring integrity. The state institutions are 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-state 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 an Ethics Committee in every ministry.

Code of Conduct for Banks and NBFIs has been introduced in November 2017 to implement National Integrity Strategy (NIS) in the financial sector of Bangladesh.  Instilling integrity, high ethical standards, efficiency and responsibility in the financial sector of Bangladesh is the prime objective of introducing this code. According to the circular issued in this respect, all scheduled banks are 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 are required to start practicing or implementation of their own code of conduct in their day to day activities by January 1, 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 all of the concerned persons to act in an honest, fair and legitimate manner.

This code of covers areas like identification of stakeholders, basic professional and intuitional obligations, code of conduct for employers responsibility towards stakeholders, property and information of bank and NBFIs, Use of position, conflict of interest, engagement in other employment, private trade or employment, external pressure, acceptance of gifts and foreign awards, fair treatment of counter parties, anti-money laundering, accuracy of records and reporting, fraud or illegal activities, work environment, team work, Diversity, employees grievance, compliance with laws rules regulations, fair and equal employment opportunity, harassment, Zero-tolerance to violence, special responsibilities of suppliers, fair treatment of customers, privacy and security of customer information, transparency or accuracy of financial tax and other reporting, interacting with print electronic and social media, guidelines for speak up policy, personal investment and insider trading, arranging seminar or workshop or training, Digitalization of business process, employee conduct outside the office premises, grooming etiquette and compliance with dress code, Post employment activities and responsibilities, responsibilities of ethics committees to uphold code of conduct, recognition and award, disciplinary procedures and action and compliance with code of conduct.

[1] Professor and Director (Training), BIBM ([email protected]).

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