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Wall Street, small banks still plagued by regulatory compliance enforcement

If recent headlines are any indication, Wall Street banks and other financial institutions continue to garner poor marks when it comes to regulatory compliance: Earlier this month, several major global banks pleaded guilty to federal accusations regarding the rigging of foreign exchange rates. Also in recent GRC news: Finance professionals believe unethical behavior persists in Wall Street, and foreign companies don’t view the chief compliance officer role as important.

Five large global banks charged of foreign currency manipulation

Last week, four major global banks pleaded guilty to U.S. Department of Justice charges of conspiring to manipulate foreign exchange rates. Traders at Barclays, Citigroup, JPMorgan Chase and the Royal Bank of Scotland created online chat rooms to collude over the price-fixing scheme that took place from at least 2007 to 2013.

Another large bank, UBS, was also accused of manipulating foreign currencies. Although it was not criminally charged for the wrongdoing, the bank’s nonprosecution agreement stemming from a previous manipulation of a financial benchmark was voided.

The five banks agreed to pay $5.6 billion in penalties.

The lack of government oversight, combined with pressure to wrest profits out of a market that is generally less profitable than others, laid the framework for this scheme, reported The New York Times. In the wake of the 2008 financial crisis, Congress passed rules to better regulate Wall Street trading operations, but the Treasury Department exempted parts of the foreign market from these new rules, according to NYT.

The regulatory divide has begun to narrow in the aftermath of the rigging scandal, with financial regulators monitoring currency trading at higher levels than other fixed businesses, NYT reported.

Community banks face more enforcement actions

The number of enforcement actions against banks and credit unions rose 30% from Q4 of 2014 to Q1 of 2015, according to the Banking Compliance Index from compliance services provider Continunity. Sixty percent of these actions were taken against institutions with assets of $250 million or less, almost 20% more than in the previous quarter.

This increase in regulatory oversight is due to two factors, reported The Wall Street Journal: more Dodd-Frank rules coming into effect, and greater emphasis on Basel III anti-money laundering violations. Pam Perdue, Continuity’s executive vice president of regulatory operations, told WSJ that a lack of familiarity with Dodd-Frank rule changes, coupled with external pressures to stay competitive, are causing these small banks to cut corners, particularly in compliance.

Survey: Unethical culture persists in Wall Street

Despite new regulations such as Dodd-Frank and increased regulatory scrutiny of Wall Street firms, a recent study has found that many financial professionals in the U.S. and U.K. believe unethical behavior and wrongdoing persist in the workplace.

A survey conducted by law firm Labaton Sucharow LLP found that about 47% of the 1,200 respondents think it is likely that their competitors have engaged in illegal or unethical activity to gain a competitive edge, a 39% jump from 2012. Over one-third of survey respondents who make at least $500,000 annually reported witnessing, or knowing firsthand about, wrongdoing in the workplace.

The following are some of the more worrying findings: About one in five respondents believe they must at least sometimes engage in illegal or unethical activity to be successful; 32% believe the existing compensation structures and bonus plans at their companies impel employees to “compromise ethics or violate the law”; and one-third of respondents think that the financial industry hasn’t improved since the 2008 financial crisis.

The report’s findings should be taken with caution, said Andrew Ross Sorkin of The New York Times, because Labaton Sucharow often represents whistleblowers in cases against financial institutions. Still, Sorkin pointed to concerns that were also voiced by William C. Dudley, the president of the Federal Reserve Bank of New York, in a speech last year: “The pattern of bad behavior did not end with the financial crisis, but continued despite the considerable public sector intervention that was necessary to stabilize the financial system.”

One big problem, said Sorkin, is that not many people who work in finance are willing to report bad actors, despite the whistleblower program developed by the Securities and Exchange Commission.

Large foreign companies forgo chief compliance officer

Although large U.S. companies and U.S. regulators both view the chief compliance officer (CCO) role as highly important, some large foreign companies don’t see the need for the position, WSJ reports. These foreign companies include Italian oil and gas company Eni S.p.A., Russian energy company OAO Gazprom and Japanese car manufacturer Toyota Motor Corp. Instead, Toyota and Eni have committees that handle compliance, and Gazprom distributes its internal compliance function among multiple divisions that report to various top managers.

Governance experts strongly advise companies to have a single individual overseeing compliance operations, according to WSJ, and some believe lacking a CCO makes companies vulnerable to more risk. Others disagreed, saying a coherent compliance program is what matters.

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