Wrongdoings could be money laundering, terror financing, insider trading, fraudulent activities and many other such similar criminal acts. Wilful blind eyes cause the collapse of big institutions confining them to the pages of history for case studies
“Wilful Blind Eyes” are those who wilfully turn blind eyes to any wrongdoing happening, even when they see it happening all around them. It is this conscious, deliberate blindness that nurtures corruption, dishonesty and lack of transparency.
These wilfully blind eyes operate hands-in-glove with the shoddy characters. They deliberately ignore the obvious and allow them to do their job freely. These wrongdoings could be money laundering, terror financing, insider trading, fraudulent activities and many other such similar criminal acts. If these wilfully blind eyes happen to be employees of a bank or a financial institution, they will be subjecting their organisation to embarrassingly huge compliance, legal and reputation risks and also cause its demise. Institutions can also be wilful blind eyes. BCCI instantly comes to mind as everyone in the bank—right from the top to bottom was engaged in fraudulent activities that mostly related to drug money.
Enron, an American company, is another example that went bust more than 10 years back after it came to light that it had been growing by fudging its numbers and doing some funny accounting. Jeffrey Skilling and Kenneth Lay, the CEO and chairman of Enron, pleaded that they just did not know what was going on in the company and hence could not be held responsible for it. The court asserted that “Skilling and Lay could have known, and had the opportunity to know, just how rotten their company was. Their claim not to know was no excuse under the law. Since they could have known, they were responsible…The law does not care why you remain ignorant, only that you do.”
The rogue trader Nick Lesson’s unchecked risk-taking transactions caused the collapse of Barings Bank. Was it deliberate or was someone behind? Peter Baring himself didn’t ask the question but merely stated: “This was deliberate”.
It was the wilful blind eyes that caused the collapse of these big institutions confining them to the pages of history for case studies purposes. Back home there are chain of cases, prominent among them securities scam perpetrated by the wilfully blind eyes.
These cases demonstrate that wilful blinds can cause irreparable loss to the organisation leading to their collapse but they also highlight that employees are integral to the success of the organisation.
How these wilful blind eyes emerge can be explained as under:
• A weak-willed employee gets entangled into a difficult financial situation and finds it difficult to extricate himself/herself out of the mess, or an employee looking for a “get rich quick” way to lead lavish lifestyle can be an easy target for recruitment by a money launderer to help in running a money laundering scheme
• Another telltale sign of a possible “bad apple” (wilful blind eye) employee is when he becomes sympathetic to a certain political, ethnic or religious group, and is known to be advocate of that political cause, or perhaps is an inside operative or a ‘mole’, taking care of/facilitating their financings at the organisation.
These two (illustrative) high-risk-employee scenarios could become the “wilful blind eyes” at the institution, dragging the institution into unpleasant situations.
Organisations must have a robust KYE (know your employee) system capable of uncovering the past criminal misdeeds and unethical performance/conduct. New hires must be subjected to detailed background checks, beyond that of educational credentials and work experiences. Good pre-employment screening reduces the risk of employees committing fraud, ensuring that, in the words of Hitesh Patel (of The Risk advisory Croup), “there are no skeletons in the cupboard”. Screening existing employees where a change in responsibilities may give them a greater opportunity to commit fraud or to cover their tracks. Suppliers of temporary staff or contractors need proper screening processes, too.
Second, the institution must have an ongoing and regular review of conduct to detect any possible changes in the employees’ lifestyle, orientation, etc, especially employees who deal directly with the clients or who have decision making authorities over cash or other financial transactions.
Third, the organisation must have an annual employee rotation plan for relationship managers, tellers, key staff and branch personnel. A branch manager should not spend more than two to three years managing a branch; tellers can easily rotate in different distribution points. Transactions, such as deposits, wire transfers and cash withdrawals that follow an employee from one location to the other should immediately raise a red flag. Prevention is better and more urgent than detection.
It should not be so difficult to detect an employee’s possible involvement in a money laundering scheme or in any fraudulent activity by being “a wilful blind eye”. A few of indicative abnormal employee behaviour patterns are:
• Quick and sudden change of an employee’s lifestyle quality, for example owning a high-priced sports car
• Reluctance of the employee to go on a vacation for a long time
• Employee’s spending habits become noticeably unrealistic in line with his/her known income levels
• Employee getting too close to a certain client or group of clients
• Employee refusing or avoiding getting transferred from a certain branch or function
• Senior management overridden
• Certain customers or suppliers dealt with exclusively by one employee and guarded jealously
• Certain apparently mundane tasks retained when they could be delegated
• Entering into unnecessarily confusing or complex transactions
• Transactions or structures created with no clear purpose
• Evasive or excessively complicated answers to routine queries
• Success out of proportion with competence or equally able colleagues
• Employee becoming too protective and defensive of a client’s relationship details
• Employee’s sacrificing raises and promotion for the sake of keeping the same position/work location.
These are some of the behaviour patterns better described as “red flags”. If any of the above situations take place at the organisation, action must be initiated to deal with the issue swiftly and steadfastly. The compliance chief must be informed. The suspected ‘mole’ must be placed under intense scrutiny, and if the suspicion gets stronger and is established, he or she has to be taken off his/her duty and investigated. And if enough evidence of malpractices is found, the organisation should consider reporting him/her to the local authorities for further action/prosecution.
Employees know the organisation system very well and are supposed to have been well trained in anti-money laundering compliance and in dealing with money laundering cases and situations. If their performance is not well monitored regularly, they could become a lot more dangerous and riskier than the money launderer himself... For banks and financial institutions, KYE is as important as: Know Your Customer, popularly known as KYC. To Fight Laundering, Know Your Employees Along with Your Customer. Work on a “trust but verify” basis.
(Saiyid (SSA) Zaidi is a training and development consultant as well as external subject matter expert at the Educom Group Banker's Academy in New York.)