A/customer-related risks, for example, ml of the proceeds of corruption through a bank
B/ banks/publicofficials risks. eg: lobbying
2 types of corruption crime: bribery ; ml
country-by-country reporting requirements in the EU. There is also guidance, eg oecd.
<> COCOO: since the globalbanking sector is the channel of global financial flows, it has a special duty to combat corruption
Governance framework
The FATF and Wolfsberg guidance documents:
place emphasis on the importance of senior commitment and leadership in a bank’s compliance framework. Ultimate responsibility for compliance should lie with the bank’s board, and senior management should have a thorough understanding of the risks to which the bank is exposed. The board should receive regular, objective information on the effectiveness of controls…..A bank’s governance framework should be structured so that all staff have responsibilities under its compliance policies and procedures.
The Basel Committee paper (2016): principles of the three lines of defence:
1st line: business units: must identify, assess and control the risks associated with their activities.. the business unit assumes “primary responsibility for achieving compliance”.
2nd line: the compliance department : has responsibility for the on-going monitoring of the business’ fulfilment of these procedures.
3rd line: the internal audit: conducts independent evaluations of the effectiveness of controls.
Risk assessment
Key factors:
- the types of products and services offered by the bank, such as retail, corporate and investment banking, investment services and correspondent bank services
- the countries to which the bank is exposed through its own activities or its customer activities, particularly countries where there are high levels of financial crime
- the profile of the bank’s customer base
- the nature, scale, diversity and complexity of the bank’s business, including the volume and size oftransactions
The risk assessment should be reviewed and updated on a regular basis.
banks should conduct anti-corruption project due diligence prior to commitment to an investment, particularly for transactions involving participation by states and state-owned entities.
Areas of control: employee conduct
The Wolfsberg anti-corruption guidance covers key areas governing the conduct of banking staff in their interaction with public officials…using these risk-controls:
payments to public officials
gifts and hospitality, marketing and sponsorship activities
charitable and political payments
employment and work experience, for example, internships
employee conflicts of interest and the problem of the “revolving door” of appointments between the public and private sector
principal investments and control fund acquisitions/joint ventures
engagement of third-party providers, including intermediaries, contractors, vendors and suppliers, to ensure parties providing services to a bank, are reputable and act with integrity.
Each of these areas of vulnerability necessitates specific internal controls. The core elements of an internal control framework include:
- A written anti-corruption policy which is applicable group-wide. The policy should explicitly prohibit payments to public officials to improperly influence behaviour or secure an advantage; evidence “tone from the top” from senior management and the bank board; and set out the consequences for employees for non-compliance with the policy.
- The bank should have procedures and provide practical guidance to employees on acceptable gifts and hospitality, marketing and sponsorship activities. The procedures should be based on reasonable monetary thresholds with escalating levels of approval required for higher value or higher risk activities. Cash payments should be restricted or prohibited. There should be a register of these activities and specific record-keeping requirements.
- A key control related to charitable giving is duediligence on the recipient organisation to confirm its proper registration, history, reputation and the legitimacy of its activities. There should be a clearly defined procedure for approval of charitable and political contributions, which could include approval by the compliance head. The bank should make a public statement that charitable and political contributions are not intended to improperly influence action or obtain any business advantage. The bank should maintain and publish records of contributions on its website.
- All recruitment, including paid and unpaid work experience, should be governed by consistent, meritocratic recruitment procedures and based on formal job specifications. There should be heightened scrutiny, such as by obtaining additional references and requirements for approval of appointments by compliance, of candidates associated with public officials.
- Employees should be required to disclose potential conflicts of interest, such as those arising from their own and family member corporate interests and relationships with public officials. A procedure should be in place for managing conflicts where they arise. The bank should place restrictions on the post-public employment of politicians and civil servants within a defined period.
- Banks should undertake anti-corruption due diligence ahead of significant acquisitions and investments. This can include examining the reputation and history of the target business, the reputation of its management, the points of contact with government and the standard of the target’s anti-corruption controls. The bank should also include relevant contractual provisions, such as representations and warranties for compliance with applicable anti-corruption laws and the right to audit the target’s books and records.
- Due diligence measures should be applied to all third-party providers. Providers should be risk- assessed, for example, by considering the extent of government interaction and the fee structure of the engagement, and the level of scrutiny of the provider adjusted accordingly. Media and litigation searches to identify adverse information should be undertaken. Onboarding procedures should include questions related to corruption, and the provider should be contractually required to abide by the bank’s anti-corruption policy.
- Secure and easily accessible channels for raising concerns (whistleblowing) should be available for all employees. Staff who report concerns in good faith should be able to do so without fear of reprisal. The U4 Helpdesk has previously published guidance on best practices and challenges for whistleblowing systems in multinational companies
Customer-related risk control
The primary anti-ml/corruption control: customer due diligence (CDD) +Suspicious activity reporting (SAR)
The FATF guidance (2014) states: in the CDD, banks should :
-form an understanding of the purpose and intended nature of the business relationship.
– confirm the ultimate BO. This process involves collecting customer identity and proof of address documents for individuals as well as incorporation documents and registers of directors and shareholders for corporate entities.
Certain types of customers must be subject to enhanced due diligence (EDD)
The bank may also commission an independent intelligence report on the customer.
Politically exposed persons (PEPs)
peps present high corruption risks
FATF (2013) guidance on PEPs: includes red flag indicators around behaviour, sources of information to determine whether an individual is politically exposed and the measures applicable to different types of PEPs
FCA: guidance on PEPs for anti-money laundering purposes and proportionate due diligence measures
Awareness and training
policies, standards and procedures should be regularly and effectively communicated to staff at all levels.
Country-by-country reporting
In the European Union, ngo advocacy contributed to the inclusion of country-by-country reporting (CBCR) in the Capital Requirements Directive IV:
requires annual disclosure requirements for credit institutions and investment firms on a list of subsidiaries and the type of activities they are involved in, number of employees, revenue, profit or loss before tax, corporate tax and public subsidies received in each EU member state
The data should be presented in an accessible format on the bank’s website. Oxfam used the data available for 2013 to highlight the disproportionate holdings of banks in tax havens relative to their activities and number of employees in these jurisdictions
Anti-corruption reporting
the Global Reporting Initiative (GRI) guidelines for businesses (not just banks) recommends publication of:
- an organisation’s risk assessment procedures
- the identification and management of conflicts of interest
- how the organisation ensures that charitable donations and sponsorships are “not used as a disguised form of bribery”
- the detail of training programmes
- confirmed incidents of corruption and actions taken
- whether the organisation participates in collective action initiatives to combat corruption
Example transparency indices
- Transparency International’s global study of Transparency in Corporate Reporting (2014) included 31 banks and financial service companies. The study covered reporting on anti- corruption programmes, company holdings and the disclosure of key financial information on a country- by-country basis. It found that the financial sector scored below average in each of these three areas.
- The CPA-Zicklin Index of Corporate Political Disclosure and Accountability (2016) tracks the transparency of political engagement by the largest US public companies.
- In 2015 Transparency International UK reviewed the public reporting practices on political engagement of the 40 largest public companies listed in the UK in its Corporate Political Engagement Index, which included eight financial services companies. The practices covered included political contributions, lobbying and the revolving door of individual movement between the private and public sectors.
- In 2013 the Dutch non-governmental organisation SOMO published a report and rankings on the transparency of lobbying practices of six Dutch banks. The report found that, based on publicly available information, it was not possible to analyse the extent of influence that banks have on public policies. It provided recommended steps for banks to increase the transparency of their lobbying practices