5 Risky Types of Conflict of Interest + Best Practices

For businesses, conflicts of interest are fraught with risk. From financial losses to reputational damage, when employees are not solely acting in the interest of the company, there can be severe repercussions.

For example, in the late 2010s, the deputy governor of a European central bank failed to declare that her brother held a senior role in a bank that she would be responsible for regulating. When the conflict of interest came to light, it became impossible to retain her position any longer and she resigned. The matter could have damaged the central bank’s standing in the industry, with the robustness of its selection committee being called into question.

This article explores the various types of conflict of interest and methods for mitigating and managing them.

1. What is a conflict of interest?

A conflict of interest occurs when the interests of a person clash with their professional obligations. The conflict means that it becomes more difficult to make unbiased decisions as part of their official duties for the benefit of the company because to do so might damage their own vested interests away from the company.

Even if they maintain their dedication to the company for which they work, their judgement may be questioned by internal and external stakeholders because of the apparent conflict of interest.

2.Types of conflict of interest

2.1 Professional conflict of interest

When an individual holds roles at two different businesses, there can be a conflict of interest.

2.1.1 Examples:

If the two companies are in direct or indirect competition with each other, a decision the individual makes in one company may disadvantage the other. This leads to them having to choose which organisation benefits rather than acting in the best interests of the company.

If one company puts work out to tender and the other company connected with the individual bids for the work, they could have undue influence over the awarding of the contract. For example, they could use their position to pick the other company with which they have an allegiance, rather than the most appropriate choice for the firm hiring.

2.2 Personal conflict of interest

Sometimes conflicts of interest are created through personal relationships, where the individual in question favours those people closely associated with them over other employees and potential business partners. In this case, it can appear that the individual is not working to find the right fit for the business, but is rather looking to help out their friends and family.

These associations can be family members, romantic partners, friends, business partners or simply employees that the individual favours for any reason other than their ability to do the job.

2.2.1 Examples

Being on the selection committee for a role for which a family member is an applicant. The individual could be tempted to advocate for their relative, rather than a candidate who is better suited to the position.

Holding a position with decision-making power over awarding a contract, where one of the bidding parties is owned by someone with whom the individual shares a separate outside business interest.

2.3 Financial conflict of interest

Financial conflicts of interest occur when the individual stands to make personal gain financially from decisions they make on behalf of the company for which they work, even if that is to the detriment of the organisation.

This can include profiting from the poor performance of the business or acting against the best interests of the organisation’s clients in order to make money. This can be illegal, as well as damaging to the finances of the business and its clients. It may also undermine trust in the company’s competence.

2.3.1 Examples

The employee may use their personal investment account to buy shares in a rival company. This means that they might benefit financially from their employer underperforming.
An employee at an investment company advising major clients on trades in an area in which they have holdings. The risk is that they might advise the client to make a market-moving investment in a company in which the individual is also invested rather than in a product that would be of most benefit to the client.

2.4 Legal and ethical conflicts of interest

Sometimes, individuals might attempt to make gains for themselves – or even on behalf of the unwitting company – through methods that are unethical or non-compliant with the legislation in their territories.

Whether it is an individual receiving bribes or kickbacks for taking certain actions in their working life, there can be serious repercussions. Breaking confidentiality agreements may result in sharing sensitive business information or even market abuse and misconduct.

These types of conflicts of interest can lead to sanctions such as significant fines and even prosecution for some of the parties involved. The business can also be held liable for the activities of its employees, highlighting the need for a robust compliance culture.

2.4.1 Examples

Taking a secret payment from a potential supplier in order to prioritise their company in procurement negotiations. This would lead to preferential treatment over other, potentially more suitable vendors.

Spoofing large orders for a company’s stock without intending to complete the transactions, giving the false impression of demand and raising the price of the financial instrument.

2.5 Insider information

This occurs when an individual gains knowledge of specific, non-public information that could affect the price of a financial instrument if it were known publicly. Under the Market Abuse Regulation, they are under a legal obligation not to distribute that information or to use it to inform a financial transaction.

However, some individuals may be tempted to misuse inside information for the purposes of insider trading or for advising associates on trades they should make. This presents a conflict of interest with the company that is bound to keep that information private.

Leaking confidential information from within or undertaking corporate espionage to find secrets out for others are also situations whereby individuals act against the interests of the company.

2.5.1 Examples

An individual with access to inside information about a client’s forthcoming merger may buy shares in the company it will merge with. Later, they can benefit from an increased share price after the move is announced to the markets.

Informing a family member with stock in the company at which the individual works that its financial results will be below expectations and encouraging them to divest before the share price drops.

3. Best practices to prevent conflict of interest

Here are some ways in which you can prevent conflicts of interest within your organisation:

Method	Explanation
Develop a conflict of interest policy	Ensure that all employees understand the company’s stance on conflicts of interest, what constitutes a conflict and what to do if one arises. Distribute the policy to all stakeholders.
Foster a culture of integrity	Demonstrate your commitment to compliance and integrity with robust policies, whistleblowing channels and clear sanctions for contraventions.
Require disclosures	Ensure that employees can easily disclose an actual conflict of interest as it arises so that action to mitigate it can be taken straight away.
Conduct regular training sessions	Show employees what conflicts of interest may look like and reaffirm the need to disclose them immediately, as well as the consequences of not doing so.
Establish oversight mechanisms	Use RegTech to monitor for conflicts of interest by employees, alerting management to potential issues.
Screen vendors and partners	It is not just employees who might have a potential conflict of interest with the company as part of their official duties. Issues can relate to external stakeholders, too, so extend your screening to all business relationships.

4. Real-world examples of conflict of interest

Three individuals in the EU manipulated the markets using wash trades to move the price of financial instruments, only allocating trades to funds they managed after they knew whether they had gained or lost. They were found not to have acted in the best interests of clients, who lost an estimated €50 million because of their actions. The individuals and the companies they represented were fined a combined €35 million. Read the full story.

An EU-based trader received a record fine for insider dealing after utilising inside information from his cousin. The latter worked for a bank and had knowledge of a state-run organisation’s takeover of a logistics company. The trader accrued €8 million of shares in the logistics firm, profiting by more than €6 million when the deal became public. The trader received a €14 million fine with his cousin fined €400,000 and the bank for which he worked faced reputational damage for the information leak. Read the full story.

A European bank employee defrauded one of the bank’s clients. The client wanted to exchange the €3.2 billion proceeds of a sale into sterling and asked the bank to facilitate the transaction. Knowing this, the employee purchased large amounts of sterling in his proprietary account, encouraging other traders to do the same. These actions moved the value of sterling to such an extent that the bank profited by €7 million and the traders received increased bonuses. The client lost millions in the transaction. As a result, the employee was jailed for two years. Read the full story.

5. FAQs

5.1 What is the most common type of conflict of interest?

There are many common forms of conflict of interest. Among the most common are financial conflicts during an employee’s official duties and personal conflicts of interest, where individuals put their friend and family relationships ahead of those of the business.

5.2 What are the 4 Ds of conflict of interest?

The four Ds are:

Disclose the conflict to management

Distance the individual from the conflict of interest while you investigate

Delegate the tasks that fall under the conflict to another employee

Dissociate the employee from any decision-making affected

5.3 What should an employee do if they suspect a conflict of interest?

If an employee suspects they have a potential conflict of interest, they must report it immediately to their management team and take action to avoid it impacting the company. If they suspect someone else of a conflict of interest, they should report it confidentially for the company to investigate.

5.4 Can conflicts of interest be completely eliminated?

Conflicts of interest cannot be eliminated entirely, but they can be effectively managed and mitigated through proper policies and procedures. Regular oversight, transparent communication and appropriate training can help mitigate the risks associated with conflicts of interest.

5.5 What role does leadership play in managing conflicts of interest?

Leadership plays a critical role in managing conflicts of interest by setting the tone for ethical behaviour, establishing clear policies, creating confidential reporting channels and ensuring accountability throughout the organisation.

6. Conclusion

These types of conflict of interest are particularly risky for companies that need to maintain compliance with the law and act in the best interests of their clients. They should protect their operations from employees whose interests may be divided between them and another entity or individual.

TradeLog is a digital tool that helps you discover and manage conflicts of interest. You gain an overview of each employee’s outside roles and investments, comparing them with your client and vendor lists to detect conflicts. To find out how it can improve your compliance efforts and protect your business, request a demo of TradeLog today.