G20 must address financial integrity as corruption surges through major banking

Allegations of insider trading at Nomura, money laundering at HSBC, interest rate manipulation at Barclays – it’s one scandal after another! Some say mega-banks are too complex to manage and control, others blame bad management, still others say the culture is rotten. Corruption abounds. Greed, secrecy, arrogance, lack of a moral compass, and opportunity all combine in too many financial institutions. This prompts very highly paid executives to abuse their offices for their personal benefit at the expense of their own institutions, colleagues, shareholders, bank customers and, more broadly, the financial system itself.

There have been so many big banking scandals of late that you have to wonder whether the regulators and supervisors of our financial system have been on permanent holiday. You can try and find out, good luck. The word “corruption” or “integrity” do not feature on the websites of the Financial Stability Board (FSB – www.financialstabilityboard.org) and the Basel Committee on Banking Supervision (BCBS – www.bis.org/bcbs).

I have worked for banks for the last 20 years, waded into the trenches of regulatory detail, scripted speeches and articles for the chief executives, and organized international press conferences where they discussed improvements in risk management.  I have seen many industry surveys on improvements in risk governance since the financial crisis. I have a lot of respect for many of those who I have come to know well at the helm of the industry. But, the latest scandals convince even me that the banks are not able to eradicate corruption through voluntary management initiatives. The rules of the game must change, the regulatory police must act.

There is a great deal that the banks can do of course. They need very tough, independent boards of directors and reputation management committees on these boards. They need to ensure that their boards are really representative of the broad base of their customers. Banks must be far more open in public discussion about how they pursue the cultural and governance changes that make them far more accountable to their shareholders and the public (see some additional detailed suggestions below).

But, real change will only come when the public authorities charged with regulating and supervising the banks start doing their job. Too many of the regulators have been comfortable, complacent and close to those who they should be policing.

Leadership for reform needs to come from the Group of 20 (G20) Summit leaders who ought to be increasingly embarrassed by the tidal waves of financial scandal. They have the mandate to strengthen the global financial system and secure an environment of growth which, candidly, is bunk if you don’t make sure the banks are operating as they should, enjoy public confidence and serve the needs of the economy first.

So what should be done?

Simple one-line recipes are not appropriate. We need detailed, wholesale reform. I believe the starting point should be the establishment by the G20 of a high-level FSB group to develop standards for bank regulatory and supervisory authorities that engender public trust by sharply improving their public reporting to enhance transparency, to strengthen accountability and to ensure integrity. Let’s put some flesh on these bones.

Transparency International has a working group of civil society activists from across the world working on this agenda and, in summary form, here are a few of its recommendations:

• Ensure regulators are excellently trained and have meaningful powers over bank managers.
• Bar conflicts of interest to ensure regulators do not sell out, turn around and become bankers.
• Boost whistleblower protection at banks.
• Ensure the FSB and the BCBS, at a minimum, adopt levels of information transparency that are now standard at the IMF and the World Bank (see those websites I mentioned above and you’ll note how little real information on process, approach, and real consultation - zero with civil society - exist at the financial authorities).

At the same time, on the banks themselves, Transparency International proposes that far more information should be made public on actual and potential business risk areas. This includes:

• Reporting on anti-corruption programs covering bribery, facilitation payments, whistleblower protection and political contributions.
• Disclosing information on organizational structures including the names, percentage holdings and country of operations for both fully consolidated and non-fully consolidated company holdings to ensure that contracts and intra-company financial flows are easily traceable.
• Country-by-country financial reporting of revenues, capital expenditure, income before tax, income tax, and community contributions to enable citizens to hold their governments to account on related contracts and tax exceptions as well as on the use of the revenues received.

These actions need to go together with a broader agenda of crucial actions. There needs to be systemic reforms on an urgent basis that change the financial environment profoundly. So Transparency International is urging the G20 to enforce a comprehensive package of anti-money laundering measures; finally, implement measures to repatriate stolen assets; and, enforce the OECD and United Nations anti-corruption conventions that too many governments have signed, but done nothing about. More generally, but vitally, the G20, recognizing that up to 30 per cent of foreign aid disappears due to corruption, needs to sharply improve the prevention of theft, waste and other abuse of aid and climate finance.