How to Prevent Financial Misconduct at Your Organisation

1. What does financial misconduct include? 

In relation to the markets, financial misconduct relates to activities such as fraud or dishonesty, the unlawful misuse of financial markets, financing terrorism, as well as handling or laundering stolen money.  

Some acts of financial misconduct are purposeful, committed by individuals or organisations in the pursuit of monetary gain for themselves or others. Other acts could be unwitting. For example, a bank might inadvertently fund terrorism because its anti-money laundering procedures are not robust enough to prevent terrorist groups from using an account for criminal purposes. 

Companies must take steps to prevent both willing and accidental financial misconduct within their organisation. 

2. Types of financial misconduct

3. How to prevent financial misconduct at your organisation

3.1 Establish a strong ethical culture

One of the key elements in the battle against misconduct is an ethical culture. Where there is no such environment, wrongdoing can flourish unchecked as potential whistleblowers may be unsure as to how their reports would be received. If they fear retaliation because they cannot be confident that management will welcome their claims, they may stay quiet instead. 

The remedy is to foster a culture from senior leadership downwards that promotes and rewards ethical behaviour through training, incentives and the development of intuitive reporting channels. This has the dual effect of discouraging criminal activity and encouraging reporting so that the organisation can stop wrongdoing before it becomes out of control. 

3.2 Implement robust internal controls

Internal controls to prevent financial misconduct and manage conflict of interest include creating a code of conduct and ethics, communicating obligations and sanctions for falling short of expected standards, and setting in place procedures that ensure employees must take the necessary legal steps to comply with legislation. 

One example of this is creating a pre-clearance system for employee personal trades at investment firms. For example, using TradeLog as a platform through which all employees log their desired trades means that you can set the parameters so that they are not able to make transactions that compromise their integrity or that of the organisation. 

3.3 Conduct regular audits and risk assessments

To ensure your anti-misconduct measures are working, you should audit your processes. Check that they work as they should and that they are achieving the desired results. Have whistleblowing reports dropped? If so, analyse whether that is because misconduct is reduced or whether people are being dissuaded from reporting. 

Continually assessing your conduct risk is also important. Use KPIs to track conduct risk performance and monitor results for areas in which your risk has increased. This will help you dedicate the necessary resources to the correct places to keep your company compliant. 

3.4 Implement a whistleblower programme

There are minimum requirements for facilitating and investigating whistleblower reports in each of the EU nations’ national laws, derived from the EU Whistleblowing Directive. However, you should not treat this as simply a tick-box exercise for compliance. Having a robust whistleblower programme encourages reporting that helps you tackle misconduct early and demonstrates to your employees the value you place on ethical behaviour. 

Your programme should make it easy to report wrongdoing in a confidential manner (anonymously, too, if the national law and company policy allow). It should also set in place steps for an impartial person or department to investigate the allegation and report back within three months. 

3.5 Continuously review and adapt policies

Legislation is continually evolving, with jurisdictions creating new laws and updating others. This is why compliance departments at organisations must be switched on to developments and be prepared to review current policies, adapting them to ensure compliance on an ongoing basis. 

Compliance professionals should regularly review the websites of government agencies under which they operate to be aware of forthcoming legal developments, as well as reading the industry press and networking with peers at events. You can then update your compliance plan accordingly. 

3.6 Provide ongoing training and education

Because the legal landscape never settles, your compliance education policies for employees must include regular training and communication on people’s obligations. Ensuring all staff understand what is required and the consequences of falling short of those expectations, both personally and for the business as a whole, is an important step in preventing financial misconduct. 

Employees must understand the laws within which they must operate, the processes in place to allow them to maintain compliance and how to report anything that they witness during the course of the work that might constitute misconduct. Detail any disciplinary action that will take place too. 

3.7 Monitor third-party relationships

Monitoring compliance within your own organisation is already a challenge, but monitoring third parties, such as suppliers, customers and other stakeholders, can prove even more difficult. Without complete oversight over their operations, you need other methods to ensure that your organisation’s compliance isn’t being compromised by your working relationships. 

Committing to robust know your customer (KYC) customer due diligence (CDD) protocols is important, particularly for banks and other financial institutions. Adding compliance commitments into contracts is another useful tool, as are compliance audits on third-party relationships. In addition, including the URL of your whistleblowing platform in your website and other communication channels used by third parties signposts an easy reporting channel for individuals within your supply chain. 

4. Consequences of financial misconduct

• The legal consequences of failing to prevent financial misconduct can lead to restrictions on trading for the business and criminal proceedings for stakeholders within the organisation.
• Financial consequences include the sanctions that authorities can impose on individuals and legal entities. Regulatory bodies are keen to prevent financial wrongdoing, and that means that the fines are set purposefully high to act as a deterrent. 
• Another consequence of misconduct is the reputational damage to the business associated with the crime. Even if it involves the actions of a small group of rogue employees, the fact that they were able to carry out criminal activities reflects badly on the organisation’s compliance systems. 
• Employee attrition can occur in workplaces where misconduct is allowed to occur. Staff become disillusioned with the company or the atmosphere within the building. If they don’t feel that reporting the wrongdoing will achieve anything, they can look elsewhere for employment.
• When misconduct occurs in a business, there is often a decline in investor trust in the way the company is managed. When shareholders lose confidence in the organisation’s ability to remain compliant and mitigate risk, it can affect its share price and its ability to attract investment. 

5. Notable Cases of Financial Misconduct

5.1 Accounting fraud

An EU-headquartered food manufacturer had grown to a multinational level, with more than 200 subsidiaries in nearly 50 countries, when it defaulted on a bond issue. The company seemed financially healthy, with €4 billion on its balance sheet in cash and equivalents. 

However, it emerged that the company had started hiding losses 13 years previously by using fake transactions to inflate revenues and as collateral to borrow more money. The company declared bankruptcy, having committed accounting fraud of €14 billion. 

The company’s CEO was jailed for 18 years for criminal association and fraudulent bankruptcy.

5.2 Embezzlement

The state investment fund of an Asian nation was embroiled in one of the world’s biggest corruption scandals. High-ranking government officials and international banks were implicated in the embezzlement of more than US$4.5 billion (approximately €4.1 billion).

It is alleged that the money was used for a variety of activities, including paying off politicians, funding lavish spending sprees, acquiring high-value property and even funding Hollywood films.  

Major players in the scandal have been imprisoned for their roles, and authorities across the world are investigating both legal and natural persons for their part in embezzlement and laundering the proceeds.

5.3 Artificial transactions

An EU-based payment processing company had grown quickly to be worth more than €25 billion. However, investors and journalists had spotted irregularities in the company’s accounting. The business denied wrongdoing and asked authorities to investigate its accusers. 

Soon after, though, the company had to admit that it had nearly €2 billion missing from its balance sheet and applied for insolvency. It was revealed that it had invented revenue to increase its share price. This was driven by bogus transactions it pretended to make between its partner companies around the world.   

The €2 billion is likely not to have ever existed. As a result of the scandal, a number of executives were prosecuted for their roles. 

6. FAQs

6.1 What are some early warnings of financial misconduct?

There are a number of warning signs that misconduct is occurring within a business. Staff leaving in larger than usual numbers could mean they are unhappy with something within the organisation. In addition, accounts not being filed on time and delays in financial reporting should spark scrutiny, as should increasing losses and negative cash flow with no good explanation.

6.2 What steps should I take if I suspect financial misconduct in my organisation?

The first step should be to report the suspicions using the whistleblowing channels in place. This should lead to an internal investigation into the matter to uncover the truth.

If you are not satisfied with the process or outcome from your internal report, you can report to an external body, such as a trade union, audit committee or another organisation designated by the EU member state in which you are based. If you are not satisfied with that option, or you believe the matter is of urgent public interest, you can disclose the issue publicly, through the media for example. 

6.3 What role do regulatory bodies play in combating financial misconduct?

By creating legislation to cover forms of misconduct relating to finance and imposing punitive sanctions, regulatory bodies can deter wrongdoing and encourage companies to take the threat seriously within their workplaces. This helps shape corporate conduct.