GRC Controllers




Newsletter | Volume 1

Issue I
Issue II
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Issue VII
Issue VIII
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Is there no end to the Financial Scandals?



Euribor/Libor and other finance and corporate scandals show that fraud and deception apparently is in the heart of our financial system because there are constructional and structural defects are the fundaments at the basis of our current financial system. The oversight and supervisory authorities in different countries are trying to take urgent measures against the sinners, while there is a need to install farsighted global mandates, replace key parts of the current business model that focus on the customer. If not the entire financial services will blow up on our faces into another global meltdown

There are a number of serious questions on Good Governance and Compliance that must be answered to determine the consequences if manipulating the LIBOR and CIBOR rates in London, Copenhagen, New York and elsewhere. Evidence suggests that some banks have seen interest rates as a kind of self-serve smorgasbord.

By disclosing incorrect data in order to determine false interest rates, rather reporting actual, true, valid and accurate information, banks and credit institutions have gained dishonest revenues from loans and mortgage. Until the matter is entirely resolved, it is remarkable that 16 of the world's leading banks are involved in the mismanagement of the benchmark interest rate for corporate gain.

Incentives for misreporting
The storyline of "Liborgate" continues to be a little too powerful. Previously, Barclays, which initially was caught with his hand in interest-honey jar, has agreed to pay $ 450 million in fines.

Now it turns out that the group manipulated London interbank rate (LIBOR), which was a significant benchmark, already in 2008 had told the New York Federal Reserve on the procedure and made the Bank of England aware of the situation and had suggested that incentives for misreporting were removed.

Liborgate, which now has spread to several countries and involving several senior politicians, central bankers and current ministers is just one of the factors and areas with lack of Corporate Governance, Risk and Compliance (GRC), which has resulted in massive and gross manipulation of our financial markets, which is basically based on mutual trust.

Let us despite this lovely summer day, warm up with a brief review of the last few weeks many imaginative financial scandals. Almost every week produced one big surprise after another for the shocked community.

Ponzi is alive Peregrine Financial Group. It concerns a long-term fraud, which in many ways comparable to Bernard Madoff's Ponzi scheme. The scandal only came to light because the company's founder and longstanding CEO, Russell Wasendorf Sr. attempted to commit suicide and left a full disclosure of his fraud. Peregrine was a commodity broker and like another scandal in the same field, MF Global (cost: 10 billion dollars) could not segregate client funds separate from operating costs like building a 18 million dollar headquarters or pay fines and fees.

In his suicide note Wasendorf wrote that it was a mere child's play to fool the regulators.

The extensive HSBC money laundering scandal, the magnitude of which is growing steadily with new revelations daily is unthinkable. As one of the world's largest banks HSBC was a preferred and favored institution for international laundering of illegal money involving Mexican drug cartels, violating transparency rules over a six-year period, helped fund terrorism thru al-Qaeda and other similar groups.

Therefore the HSBC scandal provides more a ton of GRC components that require special treatment in a separate blog, not least because HSBC's serious misconduct was reported in both 2003 and 2007, yet continued the extensive laundering of large sums.

Navigating thru crisis without cheating
Money laundering of violently large sums of money will also receive renewed public interest. According to a fresh analysis from Tax Justice Network an estimated US$283 billion has been transferred to tax havens from 1970 to 2010. The report identifies 10 of the largest banks, including UBS and Credit Suisse and Goldman Sachs involvement.

The "London whale" scandal involving JP Morgan Chase (one of the world 'too big to fail' banks) - and the bank that received all sorts of honors, for navigating thru the financial crisis, without losing its equity due to its prudent risk management systems made a big and unwise bet with investors money and lost some 6 billion dollars.

Regain the lost confidence
How low can they go before the public hammer falls heavily on the financial executives that feel that they are performing so well that when the going gets tough, all they can claim for their defense is: We were unaware of the illegal transactions and dealings were taking place, we apologize to those who lost a fortune, we will correct these mistakes, we will give our absolute commitment to fixing what went wrong, we will strengthen our governance and compliance efforts with rules to prevent from happening again.

And while we are at attempting a hard line against the black sheep, let's take a look at the last catch. Capital One, which is the major supplier of credit cards agreed to pay $210 million as a settlement for pressuring and deceiving its card holders into buying products they could not use and did not want.

However the answer is not more oversight, but better international governance. The many scandals can give the impression that an entire industry has lost its foothold, and that the entire industry shows every sign of being seriously out of control.

On the other hand major international reforms of the banking and finance sector are inevitable.
Countries or continents must join forces and simultaneously ensure that banks and financial institutions can on their own, navigate to the calm waters and regain some of the lost confidence, because the worst is yet to come.

The regulations and requirements in the new regulations like Basel III will threaten several banks on their returns, balance sheet and generate accounting volatility. Added oversight requirements from the regulatory reforms will place additional pressure on revenues, profits and margins, which might make them insolvent, with disastrous consequences.

Instead there is a need for international regulatory rules that change the current core business model, so the entire industry can go on with their daily chores of focusing on the customer instead of derivatives, CDS or CDO as their center of attention.

Global Governance
The unfortunate byproduct of introducing even more legislation that is outdated when it goes into effect and meaningless because of compromises, exceptions and contradictions is fuzzy oversight. Even more controls, documentation, disclosures and reporting, confuses the bigger picture of providing oversight authorities with mandates, tools and resources that brings an end to the current crisis for ever.

Can we avoid the next financial crisis by doing more of the same? The simple answer is no. There must be other ingredients and spices in that compliance chowder and governance gumbo.

A step in the right direction is the foundation of a Global Compliance and Governance standards for financial institutions that are difficult to achieve in the current national framework.

At the recent Copenhagen Compliance Conference, the creation of a charter to construct an International Global Compliance and Governance model was discussed. The charter will build a common supervisory/system, to address the GRC issues to find the right components to solve the crisis.