The financial services sector has seen a significant increase in compliance requirements in just the last two years. The fourth Money Laundering Directive introduced enhanced requirements for regulated businesses to take a risk-based approach to financial crime and client due diligence (CDD), and for the real estate sector to do due diligence on both clients and the counterparties in property transactions. The Markets in Financial Instruments Directive (MiFID) 2 overhauled investment firms’ approach to inducements. The European Union’s second Payment Services Directive (PSD2) required firms to take measures such as enhanced user authentication to protect customers from fraud, alongside additional statistical reporting on fraud.
Implementing compliance measures and upholding high standards of business integrity, however, is not just a demand on company resources. It can bring real business benefits. This article suggests five ways in which we can go about compliance and business integrity in a better way and instil a corporate culture of integrity, which can bring real business benefits.
Understanding the benefits of acting with integrity
Prosecutions and convictions are often stated as the most serious deterrents to corruption. Indeed, while there have been relatively fewprosecutions under the United Kingdom’s Bribery Act 2010, the prosecution of a Skansen Interiors, employing a total of 30 people – for not having “adequate procedures” to prevent bribery – proves that companies of any size can be prosecuted for the offence. However, the benefits of business integrity can be just as powerful an incentive for businesses to act with integrity. Compliance can bring reputational benefits and financial returns in the long-term, and open up new pathways to attracting investment.
Integrity and sustainable business practices matter to customers. There are significant reputational benefits to be gained from responsible practices. Firms have received outstanding publicity for pioneering new approaches and going beyond the minimum legal requirements. For example, within the context of environmental responsibility, the Boston Tea Party coffee shop in the UK banned single-use cups. In the short-term, the company saw sales drop by 25 percent. But the coffee chain received great publicity from the BBC, The Times and other news outlets, which has significantly raised its profile within the UK.
In addition to reputational benefits, combatting corrupt business practices can bring financial benefits in the long-term. Some projects in countries with high levels of corruption and informality have taken a simple but ingenious approach of sitting down with managers of unregistered businesses that do not pay tax and regularly engage in bribery, and jointly calculating the bribes that they have paid in all of their business operations. These are then compared to how much the businesses would have had to pay in tax. The sums are often very similar. The additional benefits of paying taxes and operating officially include increased certainty and access to more sources of finance.
Integrity is also becoming increasingly important for investors. Many investors now look at companies’ environmental, social and governance (ESG) impacts when deciding where to invest. And impact investing, which looks to proactively create positive social and/or environmental impact, is a growing industry. As new and traditional investors expand the criteria according to which they invest, operating sustainably and with integrity can simply pay off.
Understanding individuals’ incentives and perspectives
Ultimately, individuals rather than companies pay bribes and engage in illicit activities. It is, therefore, important to foster a culture of integrity and align individuals’ incentives accordingly. Changing organisational culture, however, is not an easy task.
Performance indicators can significantly influence behaviour, particularly when financial bonuses are attached to reaching targets. Most people want to “perform well”, and organisations will often define what well means for individual roles. Some companies are moving away from individual to collective bonuses to ease the pressure on individuals to close deals at any cost, including by breaking the law. Performance indicators can also be linked to sound risk management and compliance, and reinforced by messages on integrity from both senior and middle management. This is to ensure that for all staff, financial profits “at any cost” are not incentivised, and that acting with integrity is a key requirement for successful performance.
Highlighting the real consequences of enabling criminals to benefit from the proceeds of crimes can increase staff dedication to compliance measures, which are designed to prevent criminals from using the firm to benefit from proceeds of the crime. It is easy to mistake white collar crimes for victimless crimes. In the context of multiple competing priorities for their time, compliance might be perceived as relatively trivial by client-facing staff. A professional handling money from a client, whose wealth he has not enquired about, will not always ask himself whether the funds were obtained by committing crimes. The employee does not see any violence, exploitation or accidents that might have been avoided if the stolen money had gone to the projects it was intended for, whether building safe bridges or delivering much-needed pharmaceuticals to clinics.
Building relationships between organisations
There are clear benefits for both the private and the public sectors from collaboration. Collaboration can help private businesses understand the public sector’s expectations of them. Laws can be difficult to apply directly to business operations, and guidance on implementing them can be often vague; public-private fora can help the private sector direct compliance resources more effectively.
The public sector, in turn, can access the information and insights that different private sector entities hold. This can complement their understanding of the emerging trends in white collar crime and what approaches are likely to be more effective to address those. The Joint Money Laundering Intelligence Taskforce (JMLIT) in the United Kingdom is a good example of collaboration between the banking sector and regulators, and as such it has been replicated in other countries, including Australia and Singapore.
Some have argued that the compliance demands placed on the private sector are becoming excessive. But the alternative to businesses doing CDD, transaction monitoring and other compliance tasks themselves would be higher taxes to enable the government to undertake the work (probably less efficiently). Compliance spending can be considered alongside the direct contributions that the private sector makes to the government and society in the form of tax. For undertakings such as infrastructure, education or healthcare, the government is better placed to do the work, and a financial levy (tax) is the best way for the private sector to contribute. For CDD work, in contrast a private organisation such as a bank has more and different kinds of data on customers, as well as more sophisticated technological tools to analyse the data available to them. The benefit of compliance work is not only a contribution to keeping society safe and prosperous; it also contributes to the continuity of business.
Some government departments have made notable efforts at building relationships with the private sector to reduce corruption and support business growth. In the UK, the Department for International Development (DFID) has emerged as one of the leading organisations focusing on anti-corruption. DFID’s work on integrity naturally focuses on developing countries, but DFID has also been a key player in trying to get the UK’s “own house” in order on anti-corruption matters. This includes funding the Business Integrity Initiative, in collaboration with the Department for International Trade (DIT) and the UK Foreign and Commonwealth Office (FCO). The initiative helps small and medium enterprises be aware of the risks and avoid bribery and corruption when working in frontier markets.
DFID has also funded numerous programmes to bring together stakeholders who have the motivation, opportunity and capacity to catalyse change and build partnerships to tackle corruption and other crimes. These include the Institutions for Inclusive Development programme in Tanzania and the Transparency Accountability and RTI Fund programme in Bangladesh, implemented by Palladium. Through these programmes, stakeholders are coached to work together on win-win issues and collaborate to overcome blockages to reform. Such a “politically smart” approach to building coalitions for change would also be beneficial beyond the context of international development programming. It can help private sector, governmental and civil society organisations collaborate on building a culture of integrity and address crimes such as corruption and money laundering.
Building relationships within organisations and fostering a culture of integrity
Relationships need to be built not only between different organisations (including in the private and public sectors) but also within organisations. Within a regulated company, the compliance team should be as integrated as possible with the business teams. This facilitates mutual understanding of the roles and pressures that each department’s staff face, builds trust and makes collaboration easier.
If compliance is insufficiently stressed or incentivised, it might go to the bottom of one’s to-do list. On the other hand, integrating compliance and integrity into daily operations will cost the firm a lot less than remediating operations or trying to mend a reputation should a corruption scandal arise. Asking potential clients simple questions about the source of wealth, investigating the nature of unusual transactions or just following up on suspicions if something does not look right can go a long way. Simple observations by staff, such as noting that the font of the bank statement looks unusual, can lead to uncovering fraudulent identities and stopping criminal operations. This takes compliance beyond a box-ticking exercise, towards an environment in which all staff ask questions and escalate concerns if something does not seem right.
Feedback and recognition can also play a large role in fostering a culture of integrity. Some companies have started celebrating staff who have made a difference on compliance matters, for example by featuring them in newsletters and highlighting who uncovered what kind of misconduct or prevented the company from working with what types of criminals. Additionally, systematic feedback from clients, partners and the community in which the company operates can help organisations and projects maintain an environment of integrity. Positive feedback will encourage good behaviour and serve as a morale boost for staff, and negative feedback will highlight “bad” behaviour before it escalates. Instilling a culture of providing regular feedback on large and small matters could also reduce some of the concerns associated with whistleblowing. For example, those who might be afraid of reporting issues at risk of being seen as “betraying” their team/colleague/client/supplier will be more likely to speak up if they see others reporting matters too.
Integrating considerations of integrity in every stage of an organisation’s operations
Considerations of business integrity should be taken further than compliance by both the private and public sectors and integrated into every stage of an organisation’s operations. Integrating compliance, businesses integrity and corporate social responsibility into operations would entail ensuring that compliance is considered in each business decision, from how much workers are to be paid, to which individuals/organisations to do business with and how to structure the company for tax purposes.
Compliance and integrity work should move away from just being a defensive “do no harm” and “do not work with criminals” exercise to an active engagement with the authorities, communities and supply chains to foster a transparent, rules-based and equitable environment from which all can benefit. This can also help organisations and their staff see the culture of integrity as their own, rather than a burden imposed on their business via directives, rules, regulations and guidance from government or multilateral agencies.
Large companies are particularly well placed to lead the pack on changing entrenched practices and interests. This is due to their higher chances to be taken seriously by governments, given the size of their investments and numbers of jobs created, and their ability to absorb the costs of change in favour of long-term gains.
While implementing change in organisations is never easy, there are real benefits to be gained from business integrity. The first step is a change of mindset – to see integrity as a key part of commercial success rather than a compliance burden.