To strengthen AML protections, strengthen sales practices
This week, Standard Chartered Bank signed a new deferred prosecution agreement and agreed to pay more than $1 billion in fines and forfeitures. This latest scandal evolved because, while the bank negotiated its earlier admission of guilt for intentionally violating sanctions against Iran and other nations, two of its officers on the sales side of banking in Dubai decided to help Iranian clients further frustrate sanctions by establishing a new and separate scheme that involved opening accounts in the names of Dubai companies that were fronts for business in Iran. The scandal would have likely gone unknown if it hadn’t been uncovered through a similar investigation of another bank.
Standard Chartered admits its account relationship personnel did this with full criminal intent to conduct $240 million in bank business. Unfortunately for the bank, this investigation uncovered that this criminal conduct was, in part, missed by the fact that it failed to provide adequate compliance staff and resources.
I wish this story was something new, but it’s not. It is a classic example of dual-brain syndrome — a disease that is deeply rooted in the institutional fiber of banking.
Senior management has a history of failing to properly evaluate mixed signals in my experience. You often have those that operate the “compliance brain” who conduct research hunting down red flags — they are paid a set salary regardless of how much business is generated for the institution. Nearby, within the skull of the institution, you have the account relationship or “sales brain” that is paid a base salary, plus handsome commissions based on the amount of business they develop. In contested circumstances where the compliance brain wants the sales brain to ask hard questions, a debate with senior management often ensues.
As an example, I’ll recap a conversation between compliance and sales personnel concerning a potentially lucrative correspondent banking relationship that sales convinced management to establish with a casa de cambio (house of exchange) in Mexico:
Compliance brain: The volume of cash deposits this customer anticipates receiving from their clients is excessive. Hard questions need to be asked about their due diligence, KYC procedures and adherence to Bank Secrecy Act filing requirements.
Sales brain: I know these people. They follow the law. I’ve worked in this industry for decades and dealt with other similar accounts. Compliance simply doesn’t have the practical experience that we have in sales. There’s nothing unusual about this. I’ve met the businessmen that run this operation, compliance hasn’t. Don’t you realize that this and similar houses of exchange in Mexico and other countries play a vital role for the poorest of the poor who can’t afford to bank directly with an institution? Hordes of hardworking immigrants working in the U.S. rely heavily on houses of exchange to accept and transfer funds they send to their underprivileged loved ones in Mexico and other Latin American countries. Beyond that, numerous businesses in Mexico, including those involved in the seafood, import/export, construction and other industries are often paid in U.S. currency. It’s perfectly normal.
Compliance brain: Well, if what you say is fact, we need to examine their adherence to compliance and KYC standards. We should sit down with the owners and get details concerning their major clients.
Sales brain: You don’t understand. That isn’t necessary. We have references from reputable banks and businesses concerning this potential customer. You’re going to scare this business away by asking unnecessary questions that they will perceive as an invasion of their proprietary information and privacy. We have to scale down what your requests. The client is going to think we don’t trust them, and that isn’t good for business. They’ve even given us copies of currency and monetary instrument reports, or CTRs, they’ve filed on occasions when they have had armored cars bring cash from Mexico to the U.S. so they could make deposits in an account they maintained in the U.S. If this was dirty money, would they be filing CTRs?
Compliance brain: We need to see what they do with the bulk of their dollar deposits. Are they sending large wire transfers to companies in free-trade zones, sending money to China, sending wires to the U.S. for plane purchases, etc.?
Sales brain: This is overkill. Now we not only want to know who their customers are, we want to know who their customers do business with? Where will this end?
I don’t mean to suggest that all of those that operate the sales brain are corrupt or have less integrity than those in compliance. Regardless, the truth is their incentives are all about growing business, which causes them to see the half-empty glass as half-full. In the worst of circumstances, they mislead. In other circumstances, they’re sometime blinded by incentives.
I struggled with this problem until I happened to strike up a conversation with the head of the private-wealth division of a bank based in the Northeast U.S. After explaining my role training compliance personnel, he uttered those words we all hear that cause us to chuckle: “We don’t have those kinds of problems at our bank.”
But, unlike everyone else who I’ve heard say that, this guy delivered. He went on to explain that senior management had required him to sign a personal guarantee with unusual terms. In circumstances where, based on his insistence, management authorized the onboarding of an account despite recommendations by compliance otherwise, he agreed to personally reimburse the bank an amount equal to twice the amount of any fines or penalties the bank incurred relative to that account. He added, “Believe me, compliance is my friend and I have a huge incentive to keep them informed.” This is one way to awaken a financial incentive for sales to embrace compliance.
A second tack that can be taken to awaken the corporate conscience relates to compensation. All employees, whether in compliance or sales, should be rewarded for doing the right thing for their company. To do that, you have to financially reward the healthy corporate conscience you hope to build. I can’t think of a reason management wouldn’t want to strengthen compliance by rewarding an account relationship manager that brings compliance and senior management questions about an account relationship they previously onboarded, knowing full well that their actions will likely cause them to lose commissions. Absent a bonus for doing the right thing for the company, how can you incentivize a salesperson to come to management with their concerns. Doesn’t loyal corporate thinking have great value?
Another important approach solicits input from the timid loyalist. There are times when it is difficult to take on the obligation of standing up and, in effect, blowing the whistle on issues that one might see as a potentially serious problem for the corporation. Often that can happen when the problem is seen by a colleague not directly involved in the management of an account relationship. What motive is there for someone to step forward and notify management about someone else in the company that is putting the corporation at risk? Policies and procedures of every institution should include the establishment of an anonymous method of reporting these types of concerns. One would hope that wouldn’t be necessary because people own their ideas, but that isn’t always easy. Whistleblowing is looked at very differently in different parts of the world. An established/known anonymous whistleblowing process will both increase communication and cause all employees to realize that the chances of bad acts being reported are high.
So why does all this matter? Let’s reflect on the example of dialogue between the “compliance brain” and “sales brain” noted above.
The owners of the Mexico-based casa de cambio that was the subject of the debate between compliance and sales brains were, in real life, ultimately visited by compliance personnel. The owners were an older couple who had legally operated their business in years past. When asked about the due diligence they had done on one of their largest and newer accounts, they told a chilling story: “We were visited by a well-dressed man in a suit who explained to us that he had been asked to speak with us by 'Los Zetas' (the most violent drug cartel in Mexico). He said they were making us an offer. We could receive silver or lead. They would either pay us for moving their money, or we would be shot and killed. Then he took out a picture of our granddaughter walking out of her school. He said, isn’t she a beautiful young child? But it is so dangerous for her school entrance to face such a busy street. Wouldn’t it be terrible if she were run over by one of the tractor-trailers that travel that road?”
They had no choice, and they couldn’t report this to the police because they couldn’t be certain that the law enforcement people in town weren’t already on the cartel payroll.
So, if you think that some of the ideas about normalizing the double-brain syndrome are unnecessary and inconvenient, think about the inconvenience criminal organizations that successfully launder money impose on others. If we keep looking for new ways to improve our compliance performance, we will continue to restrict the amount of illicit proceeds cartels and other criminal organizations successfully launder. Not every institution suffers from double-brain syndrome, but too many do. These and other incentives are long-range prescriptions offered to instill a healthier synergy between sales and compliance that can enhance their collaboratively “doing the right thing” for their employer.
Most important, unifying the bank’s brain has the potential of achieving importance at a level that should matter to us all. It may save the next couple who might otherwise receive an unwanted visit from a drug cartel, and could even curtail the destruction rained on the free world by state sponsors of terrorism.