Improving Ethical Culture to Address Financial Crime

April 25, 2020

Work to Improve Corporate Ethical Culture to Address Financial Crime in Banks

(Published in the Financial Express in 2018)

Dr. Shah Md Ahsan Habib[1]

Occurrence of unethical behavior affects all work environments in banks and establishing formal internal controls hardly prevent unethical behavior as human behavior is influenced by a multitude of factors. Several issues like trust, leadership, and job security have influences on ethical behavior; factors such as authority, conformity, and peer pressure have a stimulus. Several fraud and unethical activities reveal that target pressure, time pressure, financial pressure (both on the personal as well as the organizational level) and operating in a very competitive environment are likely to influence unethical behavior as well. To manage ethical behavior, a bank should take the necessary time and resources to look at behavioral factors that influence employees’ behavior in the organization. Attention to these factors contributes to a better understanding of fraud and unethical behavior and can help create more effective and efficient internal control systems and compliance management. One should very carefully avoid the trick of some bosses for inspiring unethical activities in the name of ‘realistic behaviors’. There is no doubt that in several instances, the aggressive banking causing unethical behaviors. It is crucial for the bank leaders and management to get insight of the factors that influence ethical behavior in the banks to adopting right approach for improving ethical culture.

Employees have to know and understand every new rule or control that is to be introduced in a bank or that has to be implemented; and at the same time, a banker must distinguish and understand clearly what accepted ethical behavior is and what is not. Code of Conduct must be a clear, consistent, motivating set of guidelines written down. It might be wise to draft a basic set of general rules that act as guidelines instead of trying to regulate everything. A successful, living code is expected to be not too long, has motivating texts, relevant topics and is well implemented via communication and training. A properly implemented code gives employees clarity, motivation and also serves as an anchor point for discussing their doubts and dilemmas. Though banks are generally having a set of Code of Conduct, as they claimed, these are not clearly communicated to the bank employees. Active training and communication help clarifying the right behavior. There is also a multiplying effect that this good behavior might be seen by colleagues and therefore be copied. Communicating and training employees about the right behavior help setting the right examples in the organization. Of course, this should be done in combination with properly established internal controls: code in letters or emails; a separate intranet site on ethics and compliance; a section on the code in the in-house magazine; copies of the code available at busy locations in the bank (such as the reception, waiting rooms and the cafeteria); special information events and site visits; an app for mobile devices. Regular awareness programs, story-telling strategy might be helpful for banks. It is crucial to offer a suitable Code of Conduct with clarity and clear understanding. IT is also very effective to communicate and train the art of expressing right exemplary behavior for ethical development amongst the co-leaders and colleagues.

It is evident that if signs of possible misconduct are not recognized and acted upon, a bank runs the risk that further incidents might occur. Suspicions of misconduct should, first and foremost, be dealt with by direct line managers. However, this is not always enough to address the issue. Employees can be hindered by barriers when it comes to raising certain issues, particularly if these are of a structural nature or if their immediate superior is part of the problem. Especially in larger organizations, the establishment of a safety net is important in this respect. Smaller banks sometimes struggle with setting up a formal reporting procedure for employees to voice concerns on possible misconduct. Crucial for setting up a procedure is that it is in line with the organization’s culture. Usually a 24/7 whistle-blowing hotline doesn’t work for a smaller company because of the scale. For smaller organizations there are more effective and cost-efficient solutions. Every bank should have a proper reporting procedure on possible misconduct for an important behavioral reason. Promoting ethical practices require positive and negative incentives. In a corruption-ridden system, an attempt to curb corruption will come up against entrenched work culture and can achieve only modest success to start with. But with prolong vigilance and threat of punishment, the behavior patterns may start to change. Exemplary punishment may discourage internal perpetrators in getting involved in criminal and unethical activities. It is important to react adequately to misconduct as a prevention strategy.

It is recognized that ensuring transparency has no alternative. Establishing transparency through structures and processes is a crucial strategy to foster an ethical organizational climate, which is really important to regain customer confidence. Corporate values need to be connected with Measurable Indicators.  The organization included these behavioral indicators in the performance appraisal system, which was used to assess employees’ performance regularly.  Existing literature also confirmed a link between employee engagement and the creation of an ethical climate. The studies explained that friendly and engaging corporate culture, which resulted in a family atmosphere, a dedicated department should organize informal staff gatherings on a regular basis. Research has shown that employee engagement increases with positive peer relationships and a favorable working environment. Top management’s essential role in creating an ethical environment confirms insights gained from existing literature.

Role models facilitate the acquisition of ethical behavior and ethical leadership encourages ethical leadership in subordinates. The way ethical leadership flows from the top to employees is a new area of research and needs further investigation. Demonstrating leadership role-modeling and connecting soft and hard approaches to manage values will fuel an ethical organizational environment. Addressing corporate governance challenges is the key for drawing true benefits.  Bank leadership must ensure arrangement for uninterrupted vigilance with respect to customers by having sufficient knowledge about them to detect transactions that is likely to be associated with financial crime. Developing ethical corporate culture and offering due motivation of the employees are amongst the keys to address financial crimes. However, probably the most critical step at this moment is to ensure rational and ethical conducts on the part of network leadership-board and top management by restraining profit targets and ensuring sound corporate practices.  

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

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