Financial Institutions Including Banks example essay topic

UNIVERSITY OF APPLIED SCIENCES Faculty of Business Management and Social Sciences ETHICS IN FINANCE - HOW TO CONTROL MISBEHAVIOR IN BANKING (Business Ethics) Summer term 2005 Lecturer: Prof. Dr. Peter Mayer Student: Klaudia Suskov'a 300660 Date: 20.05. 2005 Table of Content 1 Introduction 32 General principles of banks 4 Banking secrecy 61. The Identity of the Client is Always Known to the Bank 62. Preserving Documents 73. Protection of Personal Data 7 Code of conduct 83 Money Laundering 8 Money laundering - Interpol's definition 8 Actions to combat money laundering 10 Anti - money laundering (Citigroup) 11 The Citigroup Anti-Money Laundering Program 124 Fraud 12 Definition of Fraud 12 Credit Card Fraud 13 TYPES OF POSSIBLE CREDIT CARD FRAUD 13 Preventing Card Fraud 18 PHISHING 18 How to recognize potential phishing scams? 19 Basic email advice 191 Introduction Ethics is the integrity measure, which evaluates the values, norms and rules that constitute the base for individual and social relationships, from a moral perspective.

Ethics in business means trying to be a good corporate citizen; trying as an organisation to adhere to certain ethical values; and trying to do the right thing by all the various stakeholders - customers, employees, suppliers and shareholders - that any business organisation has. It means "choosing the good over the bad, the right over the wrong, the fair over the unfair". Since banks, in a modern day society, almost everywhere play an important role which includes unifying and intermediary roles between the fund-supplying and fund-demanding sides of the society, executing savings and investment functions, are obliged to obey certain ethical principles of the banking profession and organizational ethics. What is called ethics in banking? Ethical values such as honesty, integrity, fairness, responsible citizenship and accountability? Is there any bank that would claim that it was right to accept bribes in return for loans, to lend to connected parties and to cheat customers?

Unfortunately, it is not as simple as this. However, there is sometimes a gap between what banks claim and what they do. As the Asian crisis has demonstrated, ethical values are still not firmly entrenched and followed in many banks in the region. Bribery and corruption have been one of the root causes of the banking problems, and the Bank Bali scandal has shown that the process of reform still has a long way to go. The business of banking and finance and those engaged in it, has a long history of providing financial services to society.

Banking business is becoming more and more complex with each passing day. One reason is perhaps the globalization of business activities, which may be summed up as the tendency of the world to become one market place. We have seen time and again that as the banks reach out beyond their home market, they become increasingly exposed to unfamiliar business environments and customers whose ethical standards may vary and may be quite different from their own. This, according to financial experts, puts an extra strain on the 'know your customers policy' about which the regulators are so unrelenting. It has been noticed quite often that when banks stray outside their home territories, ethical dilemmas crop up. Banks therefore need to be extra cautious about their business dealings and relationships with people having dubious track records.

2 General principles of banks Considering the requirements for protection of the rights and interests of depositors, establishment of stability and confidence in financial markets, along with requirements for economic development, the banks have no options but to pursue their operations in compliance with certain general principles. They are: [a] integrity; [b] impartiality; [c] reliability; [d] transparency; [e] consideration of public benefits and interests, and environmental awareness; [f] controlling money laundering. [a] Integrity: While performing their regular services, banks consider the principle of integrity in their relations with customers, employees, shareholders, national and multi-national companies and also other banks, institutions and corporations. [b] Impartiality: For obvious reasons, banks at all times have to maintain a high degree of impartiality. Under no circumstances can they discriminate between their employees and their customers. In fact they are bound to offer equal services to all, without any discrimination on the basis of nationality, religion, financial or social status and gender. [c] Reliability: It must be noted that the soundness of the banking system and its reliability factor is a matter of public concern at all times and in all societies. All banks have to keep that in mind at all times. [d] Transparency: Perhaps, of late, transparency is the most talked about subject in our society.

Banks therefore, in order to maintain complete transparency at all times, inform their customers in a clear manner of their rights and obligations, including benefits and risks of the products they offer and the varied services they provide. [e] Social responsibility and environmental awareness: Banks may fulfill their social responsibility and show environmental awareness through supporting various civil society movements in collaboration with other organisations. [f] Controlling money laundering: Money laundering these days is a big headache for the government as well as financial institutions including banks. As such, within the framework of national and international regulations, banks try to cope with such offences as fraud and money laundering while cooperating with other banks, concerned financial institutions, and government agencies for this purpose. They also take appropriate measures in their own organisations, and regularly provide their personnel with training programmes and courses against fraud and money laundering. Confidentiality is perhaps one of the most important features of modern day banking. Except for the classified information and documents required to be disclosed to the government itself and its attached organisations such as the Bureau of Anti-corruption or the Income Tax Department under the existing laws and regulations, banks are obliged to handle all financial information provided by the customers with the confidentiality. One important pillar of the banking business is trust.

In the good old days, everything depended on trust, because there were no codified laws to govern the banking business. And as banking became complex day-by-day, relevant laws and regulations had to be enacted everywhere for smooth operation of the banks and protection of the depositors. However, distortion of ethical values and moral standards has also taken place at different times and different places. Indeed violations of banking ethics have been widespread until recently, when new banking guidelines were introduced by the government in order to restrict the use and misuse of banks. The guidelines have set up difficult compliance requirements that should eventually help in preventing unethical transactions and wayward conduct.

Banking secrecy In any democracy the citizen is entitled to protection of his privacy: it is one of the fundamental guarantees of individual liberty and is recognised by the Universal Declaration of Human Rights. The right to privacy is guaranteed in the financial field by the discretion incumbent on every banker. This applies as much to banking transactions undertaken by clients in relation to their private lives as to their business transactions. The obligation to maintain banking secrecy applies to all those who are employed by or are members of any part of a bank, as well as to its auditors and the members of its board of directors. 1. The Identity of the Client is Always Known to the Bank Banking secrecy is the discretion which banks, their employees or persons belonging to any of their bodies must observe in regard to the financial and personal affairs of their clients coming to their knowledge during the exercise of their profession.

The clients' identity is always known to the bank. Hence there are no anonymous accounts. Numbered accounts are no more than an internal precaution to ensure that the identity of the account holder is known only to a few people working in a special department of the bank. Why should such a precaution be necessary? For instance, the chairman of a large firm who is also a shareholder in the firm may not wish his identity to be widely known in his bank in case he sells a substantial part of his holding to buy a house. 2.

Preserving Documents Banks must preserve their records for 10 years as of the last entry to them (five years in the European Union). The obligation applies equally to current accounts, securities account statements, and to all correspondence. The basic documents drawn up when an account is opened - showing the identity of the account holder and, if necessary, that of the ultimate beneficiary as well as that of the persons authorized to operate and issue instructions concerning the account - are permanent in nature. Accordingly, they must be kept for a period of 10 years as from the time of closure of the account. 3. Protection of Personal Data The laws on privacy are intended to protect the individual in his private life.

Today, owing to the introduction of computer and telecommunications technology, and the Internet in particular, the use of automated data processing is more widespread. The increased diffusion of personal information creates a greater risk of violation of privacy. Accordingly, the legislator realised that the provisions of the Civil Code on the right to privacy were no longer sufficient. The Federal Law on Data Protection which came into force in 1993 supplements pre-existing regulations.

It is intended to protect privacy in the processing of personal data, i.e. any information relating to an identified or identifiable person, whether an individual or corporate entity. Personal information may be collected only by means that are both lawful and bona fide. Any person processing data is under an obligation to take appropriate measures to ensure that third parties have no access to said data. Any person is entitled to be informed of the data concerning him or her contained in a data base, and of what use is to be made of that information, unless statutory provisions or his or her own preponderant interests or those of a third party prevent this. Code of conduct What tools can banks use to manage ethics in their own organisations? Clearly, the first essential is for the bank itself to be clear about the key ethical values to which it subscribes.

It then needs to ensure that the organisation and the employees act in accordance with these values. This can be done through the adoption of code of conduct. It is also necessary to have policies and procedures designed to ensure compliance with the standards specified in the code of conduct. For example, many companies now employ "ethics officers" and give their staff specific training and advice on ethical issues. The guideline issued by the Commissioner of Banking recommends that all institutions should appoint at least one senior officer to handle queries from staff and other matters relating to the code of conduct. But I would caution against too narrow a compliance-based approach towards ethics management.

It appears from survey responses carried out in some US companies that the most important factor in controlling unethical conduct within companies is how staff perceive the value that senior management attaches to ethical behavior. What matters in other words is the general culture of the organisation and the example that is set by those at the top. An important way in which behavior of staff can be influenced is, for example, through remuneration policy, and senior management needs to be careful to ensure that rewards are not given to staff that uses dubious practices to gain business. 3 Money Laundering Money laundering - Interpol's definition A concise working definition was adopted by Interpol General Secretariat Assembly in 1995, which defines money laundering as: 'Any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources'. Money laundering is the process by which criminals attempt to conceal the true origin and ownership of the proceeds of criminal activities. If successful, the money can loose its criminal identity in that it is made to appear to arise from legitimate sources.

Money laundering undermines confidence in the international financial system. The challenges in the fight against money laundering are vast, and potential threats exist in every corner of the world. In recent years, and especially since the events of September 11, 2001, worldwide efforts to combat money laundering and the financing of terrorism have assumed heightened importance. Money laundering and the financing of terrorism are global problems that not only threaten security, but also compromise the stability, transparency, and efficiency of financial systems, thus undermining economic prosperity. The laundering allows criminals and terrorists to operate freely, using their financial gains to expand their criminal pursuits and fostering illegal activities such as corruption, drug trafficking, arms trafficking, smuggling, and financing of terrorism. Money laundering and the financing of terrorism can have devastating economic and social consequences for countries, especially those in the process of development and those with fragile financial systems.

Here are just a few examples of how illicit financial flows can affect the economy and institutions of the host country: o Financial institutions that accept illegal funds cannot rely on those funds as a stable deposit base. Large amounts of laundered funds are threatening the institution's liquidity and solvency. A financial institution's reputation and integrity can be harmed if involved in money laundering or financing terrorism. o Local merchants and businesses may find that they cannot compete with front companies organized to launder and conceal illicit funds. Many such front companies offer their services and goods at below-market rates and even at a loss. Because their primary objective is the laundering of money, they do not need to compete in the marketplace and make a profit for their owners. o Money laundering may also distort some economic sectors and create instability in their markets.

Money launderers may channel funds to sectors or areas where funds are unlikely to be discovered whether or not investment is needed or real returns are offered. The often sudden departure of investments from those sectors may impair the industries involved. o Currencies and interest rates can be distorted by money launderers' investment practices, based as they are upon factors other than market returns. o Money laundering and terrorist financing do nothing for the reputation of the host country. The loss of investor confidence that follow revelations of large-scale involvement in such activities can sharply diminish opportunities for growth. Once a country's reputation is tarnished, it takes years to repair. Actions to combat money laundering The global agenda to curb money laundering and the financing of terrorism calls for a cooperative approach among many different international bodies.

Efforts to establish an international standard response against money laundering and the financing of terrorism have been led by the Financial Action Task Force on Money Laundering (FATF) and through the development of the FATF 40 Recommendations which serve as the international framework for AML efforts. In October, 2001, FATF expanded its mission to include combating the fi.