Get on Board
Last week, the International Journal of Finance and Economics published a study that appears to indicate that financial crime enforcement actions are correlated with an increase in bank risk on several measures of risk. Specifically, the impact of money laundering is amplified by “the presence of powerful CEOs and only partly mitigated by large and independent executive boards.” Using a sample of approximately 1,000 U.S. financial institutions over a period of 11 years, the study’s authors warn that institutions with “powerful CEOs warrant the particular attention of regulators engaged in anti-money laundering efforts, especially when boards of directors are small and not independent.”
From the time of the HSBC scandal a decade ago to the recent Westpac scandal, the spotlight on the role of executives and the board in managing financial crime risk has intensified and the tide now appears to be turning towards executive accountability.
Although no executive was held legally accountable for the HSBC scandal, it wasn’t as straightforward in the case of Westpac. Even before the full extent of Westpac’s violations became known, Australia’s treasurer stated that the country’s banking regulator was looking at disqualifying the board for accountability failures. Yet, while Westpac's internal review concluded the “scandal was caused by a lack of understanding of AML/CTF risks, insufficient expertise in financial crimes, and poorly defined chains of accountability,” an independently commissioned external review, which wasn’t tasked to review management shortcomings, concluded that “the board was not focused enough on financial crime risks.” Ultimately, the review absolved the board of legal responsibility by stating that “the board relies on information flows from management and it was the content of those flows that was poor. Information was (unintentionally) misleading and sometimes omitted.”
Back in 2018, the Wall Street Journal based on a survey of approximately 400 financial institutions, concluded that boards of directors “aren’t engaged enough with concerns about compliance with rules against money laundering and sanctions breaches despite a torrent of scandals and some record-breaking penalties.” The results found that approximately half of banks surveyed stated that “they didn’t provide, or weren’t aware if they provided, anti-money-laundering or sanctions training and regular briefings to their boards.”
While board training may mitigate the “lack of understanding of AML/CTF risks,” tackling the issue of information flow appears to be the most significant remediation measure. As the Westpac independent review concluded, "the statement of the duties of a company director are large and growing, but with such limited capacity boards will always have to decide which issues are to have priority [and] they cannot do everything." The review described “a very crowded agenda of 35 to 40 items and about 40 participants at each meeting.” Even its newly elected chairman stated that “it is unrealistic to expect boards to know everything that is going on across a large and complex organization such as Westpac,” while adding that “it is impossible for the CEO to know everything.” Yet, with the availability of RegTech solutions that provide risk insights that both management and boards can easily utilize, will that justification continue to be accepted by regulators?