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WHAT BANKING AND FINANCIAL SERVICES COMPANIES MUST LEARN FROM THE US EXPERIENCE OF WHISTLEBLOWING

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the us experience of whistleblowing

David Lawler, Partner, at Forensic Risk Alliance

the us experience of whistleblowing

the us experience of whistle blowing

Whistleblowing: The disclosure by a person, to those in authority, to a regulator, or to the public, of mismanagement, corruption, illegality, or some other wrongdoing.

It is a given that all companies – once they grow beyond a certain size – will have problems. This is as true for banking and financial service companies as it is in any other sector. It is often the case that as soon as a single proprietor is unable to control directly all aspects of a business’s operations, employees will find ways of bending the rules. In most instances these transgressions are fairly minor and amount to purely internal matters – a bit of petty pilfering from the stationery cupboard here; an inflated expense claim there.

Sometimes, however, things get more serious, and laws are broken that come within the remit of regulators and prosecutors: employees in far-flung locations may pay bribes to get things done, break health and safety regulations, or deliberately overcharge governmental customers. These problems are clearly far more consequential to a company than missing stationery or inflated travel expenses; they can lead to the criminal prosecution of the company itself. Although few companies are likely to match J P Morgan’s $13billion fine, the roll-call of companies with $100 million+ fines, a compliance monitor watching their every move for three years, and debarment from government contracts is increasing and the number of prosecutions growing as regulators from different jurisdictions target the same company.

Banks and financial services companies need to get themselves into a position where they are able to deal with problems in-house, handling such issues internally – before they become of interest to a regulator. They can do this by promoting internal whistleblowing, in the hope that external whistleblowing is never needed. What distinguishes a good financial sector company from a poor one (or a great company from a good one) is not the extent to which it has problems, but its willingness to learn about, understand and quickly put right those problems that it does encounter.

The US experience of rewarding external whistle blowing
For many years the US has had a mechanism whereby whistle blowers could share in the bounty. Citizens with inside knowledge of fraud being committed by contractors against the government can file what has become known as a qui tam lawsuit on the government’s behalf, receiving a share of the recovery as their reward. Such claims have been filed by people with inside knowledge of false claims that have typically involved healthcare, military, or other government spending programs.

More recently, the US Securities and Exchange Commission’s little-used Whistleblower Bounty Program was extended to cover people coming forward with evidence of any type of share fraud. Specifically, the new ‘Dodd–Frank Wall Street Reform and Consumer Protection Act 2010’ now means that individuals coming forward with information about frauds or bribery stand to receive between 10% and 30% of amounts close to $1.5 million recovered by the SEC through subsequent enforcement actions. The SEC decides the final amount based on the originality and value of the information provided and how directly it led to the financial penalty being levied against the defendant.

We are already seeing an increase in enforcement activity in the US, as, for the first time, individuals who come across evidence of suspected fraudulent or corrupt behavior have a real financial incentive to report it to prosecutors. Given the large fines in foreign bribery cases in recent years, there could be some big rewards for those prepared to speak out. On October 1, 2013, the SEC announced that it expects to pay more than $14 million to a whistleblower. (All of the SEC’s previous awards had been below $50,000.) Last September, a former UBS banker who blew the whistle on widespread tax evasion by US citizens using the bank’s accounts received a $104 million reward from the US Internal Revenue Service.

Coupled with legal protection under Dodd-Frank from retaliation, such game-changing whistleblower bounties are creating real interest and fear in Wall Street, as headline grabbing amounts create a cottage-industry in employees actively looking at opportunities to whistle blow.

Is there a UK analogue of Dodd-Frank ‘bounties’?
No – not yet. But deep in the detail of the Home Office’s ‘Serious Organised Crime Strategy’ paper published in October 2013, is the Governments desire to consult on incentivizing UK whistleblowers, including “provision of financial incentives to support whistle blowing in cases of fraud, bribery and corruption.” i

David Lawler

David Lawler

Of course, most employees don’t in any case blow the whistle to the regulator for money, or out of ill will toward the company. Most tried or wanted to report wrongdoing internally, but simply didn’t know how to, got turned away, or worse. UK banks and financial services companies operating in the US will start to experience employees and counterparties whistleblowing into US authorities, and because of the information sharing that goes on between global regulators and prosecutors, UK companies will begin to feel the knock-on effects.

With the increased implementation of Dodd-Frank ‘bounties’, it is even more important that companies get the message across that they take employee concerns seriously, to encourage any would-be whistleblower to report directly to the company, and not to the government.

An effective internal ‘speaking up’ mechanism
Individuals are more likely to take action with respect to unacceptable behavior if there is a formal policy in place which offers near-absolute confidentiality, and explains exactly ow the subsequent investigations will be dealt with.

For companies subject to the Sarbanes-Oxley Act, this anonymous reporting requirement must also be extended to third parties. Accordingly, companies often establish an anonymous telephone hotline or use an internet-based mechanism for anonymous communications and to encourage employees to express concerns. Having a clear, easy-to-use whistleblowing procedure in place, and making sure that employees know about it, will go a long way towards encouraging them to turn to their employer first when something is amiss.

There is, of course, the potential for misuse, and to use whistleblowing to settle or escalate private arguments. It is therefore extremely important both to safeguard the confidentiality of the whistleblower, and to investigate properly all allegations made. This is often best achieved by whistleblowers being able to get in touch with a designated member of the compliance department, or even the board. While many individuals will be reluctant to go directly to their boss (who might be involved), it can sometimes be easier to go to the very top.

Finally, remember that whistleblowing is not easy. For most people, fear is a more common cause of corrupt behavior than greed. People want to avoid conflict, and speaking up can taint a person’s career, even if their suspicions are vindicated, so many individuals just keep quiet. It takes courage to report wrongdoing. Even the terminology used can send an important message: so start with changing the name. ‘Speaking up’ has a far more positive connotation than ‘whistleblowing’.

David Lawler is an expert forensic accountant with over 20 years’ experience in white collar and anti-corruption investigations, insolvency litigation, and in valuing and appraising troubled, declining or formative businesses. He quantified and reported on gain and disgorgement analysis for a number of international companies charged with breaches of the FCPA by US enforcement authorities. David also performs intensive reviews and tests of the FCPA/anti-corruption systems and controls in place at overseas branches of several multinational energy and mining companies, including extensive compliance audits in South America, West Africa and Asia. David frequently serves as an expert witness on profitability, viability, and value, and assists companies to appraise and tighten their financial controls and procedures, including regulatory compliance programs.

David is the author of the textbook, ‘Frequently Asked Questions in Anti-Bribery and Corruption’ published by John Wiley & Sons in March 2012. Prior to joining FRA, David trained as a Chartered Accountant with Deloitte, before moving to set up the London forensic capability at Kroll, and then at Begbies Traynor.

Editor’s note on FRA:
Forensic Risk Alliance (FRA) is a consulting firm with offices in the US, UK, France and Switzerland. It helps businesses to resolve complex and high-risk financial, legal and regulatory challenges. Its people provide independent, conflict-free advice and litigation support services, often in the local language as its team speaks virtually all of the world’s key business languages, including most European languages as well as Arabic, Mandarin and Cantonese Chinese, Malay and Bahasa Indonesia. FRA collects and analyzes data for use in legal disputes and investigations (often cross-border) in a number of areas, including litigation, fraud, bribery and corruption investigations. The company has extensive worldwide project experience in Latin America, Asia, Europe, Africa and the Middle East. FRA is one of only ten companies in the world approved to carry out validation audits for the EITI (Extractive Industries Transparency) Initiative which evaluate how well a country’s government conforms to the EITI’s standards of transparency in reporting revenue received from the extraction of natural resources.  Members of the FRA team also provide expert witness testimony in court when required and have recently contributed two chapters to the Serious Fraud Office’s book ‘Serious Economic Crime – a boardroom guide to prevention and compliance’.

Finance

The Psychology Behind a Strong Security Culture in the Financial Sector

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The Psychology Behind a Strong Security Culture in the Financial Sector 1

By Javvad Malik, Security Awareness Advocate at KnowBe4

Banks and financial industries are quite literally where the money is, positioning them as prominent targets for cybercriminals worldwide. Unfortunately, regardless of investments made in the latest technologies, the Achilles heel of these institutions is their employees. Often times, a human blunder is found to be a contributing factor of a security breach, if not the direct source. Indeed, in the 2020 Verizon Data Breach Investigations Report, miscellaneous errors were found vying closely with web application attacks for the top cause of breaches affecting the financial and insurance sector. A secretary may forward an email to the wrong recipient or a system administrator may misconfigure firewall settings. Perhaps, a user clicks on a malicious link. Whatever the case, the outcome is equally dire.

Having grown acutely aware of the role that people play in cybersecurity, business leaders are scrambling to establish a strong security culture within their own organisations. In fact, for many leaders across the globe, realising a strong security culture is of increasing importance, not solely for fear of a breach, but as fundamental to the overall success of their organisations – be it to create customer trust or enhance brand value. Yet, the term lacks a universal definition, and its interpretation varies depending on the individual. In one survey of 1,161 IT decision makers, 758 unique definitions were offered, falling into five distinct categories. While all important, these categories taken apart only feature one aspect of the wider notion of security culture.

With an incomplete understanding of the term, many organisations find themselves inadvertently overconfident in their actual capabilities to fend off cyberthreats. This speaks to the importance of building a single, clear and common definition from which organisations can learn from one another, benchmark their standing and construct a comprehensive security programme.

Defining Security Culture: The Seven Dimensions

In an effort to measure security culture through an objective, scientific method, the term can be broken down into seven key dimensions:

  • Attitudes: Formed over time and through experiences, attitudes are learned opinions reflecting the preferences an individual has in favour or against security protocols and issues.
  • Behaviours: The physical actions and decisions that employees make which impact the security of an organisation.
  • Cognition: The understanding, knowledge and awareness of security threats and issues.
  • Communication: Channels adopted to share relevant security-related information in a timely manner, while encouraging and supporting employees as they tackle security issues.
  • Compliance: Written security policies and the extent that employees adhere to them.
  • Norms: Unwritten rules of conduct in an organisation.
  • Responsibilities: The extent to which employees recognise their role in sustaining or endangering their company’s security.

All of these dimensions are inextricably interlinked; should one falter so too would the others.

The Bearing of Banks and Financial Institutions

Collecting data from over 120,000 employees in 1,107 organisations across 24 countries, KnowBe4’s ‘Security Culture Report 2020’ found that the banking and financial sectors were among the best performers on the security culture front, with a score of 76 out of a 100. This comes as no surprise seeing as they manage highly confidential data and have thus adopted a long tradition of risk management as well as extensive regulatory oversight.

Indeed, the security culture posture is reflected in the sector’s well-oiled communication channels. As cyberthreats constantly and rapidly evolve, it is crucial that effective communication processes are implemented. This allows employees to receive accurate and relevant information with ease; having an impact on the organisation’s ability to prevent as well as respond to a security breach. In IBM’s 2020 Cost of a Data Breach study, the average reported response time to detect a data breach is 207 days with an additional 73 days to resolve the situation. This is in comparison to the financial industry’s 177 and 56 days.

Moreover, with better communication follows better attitude – both banking and financial services scored 80 and 79 in this department, respectively. Good communication is integral to facilitating collaboration between departments and offering a reminder that security is not achieved solely within the IT department; rather, it is a team effort. It is also a means of boosting morale and inspiring greater employee engagement. As earlier mentioned, attitudes are evaluations, or learned opinions. Therefore, by keeping employees informed as well as motivated, they are more likely to view security best practices favourably, adopting them voluntarily.

Predictably, the industry ticks the box on compliance as well. The hefty fines issued by the Information Commissioner’s Office (ICO) in the past year alone, including Capital One’s $80 million penalty, probably play a part in keeping financial institutions on their toes.

Nevertheless, there continues to be room for improvement. As it stands, the overall score of 76 is within the ‘moderate’ classification, falling a long way short of the desired 90-100 range. So, what needs fixing?

Towards Achieving Excellence

There is often the misconception that banks and financial institutions are well-versed in security-related information due to their extensive exposure to the cyber domain. However, as the cognition score demonstrates, this is not the case – dawdling in the low 70s. This illustrates an urgent need for improved security awareness programmes within the sector. More importantly, employees should be trained to understand how this knowledge is applied. This can be achieved through practical exercises such as simulated phishing, for example. In addition, training should be tailored to the learning styles as well as the needs of each individual. In other words, a bank clerk would need a completely different curriculum to IT staff working on the backend of servers.

By building on cognition, financial institutions can instigate a sense of responsibility among employees as they begin to recognise the impact that their behaviour might have on the company. In cybersecurity, success is achieved when breaches are avoided. In a way, this negative result removes the incentive that typically keeps employees engaged with an outcome. Training methods need to take this into consideration.

Then there are norms and behaviours, found to have strong correlations with one another. Norms are the compass from which individuals refer to when making decisions and negotiating everyday activities. The key is recognising that norms have two facets, one social and the other personal. The former is informed by social interactions, while the latter is grounded in the individual’s values. For instance, an accountant may connect to the VPN when working outside of the office to avoid disciplinary measures, as opposed to believing it is the right thing to do. Organisations should aim to internalise norms to generate consistent adherence to best practices irrespective of any immediate external pressures. When these norms improve, behavioural changes will reform in tandem.

Building a robust security culture is no easy task. However, the unrelenting efforts of cybercriminals to infiltrate our systems obliges us to press on. While financial institutions are leading the way for other industries, much still needs to be done. Fortunately, every step counts -every improvement made in one dimension has a domino effect in others.

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Has lockdown marked the end of cash as we know it?

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Has lockdown marked the end of cash as we know it? 2

By James Booth, VP of Payment Partnerships EMEA, PPRO

Since the start of the pandemic, businesses around the world have drastically changed their operations to protect employees and customers. One significant shift has been the discouragement of the use of cash in favour of digital and contactless payment methods. On the surface, moving away from cash seems like the safe, obvious thing to do to curb the spread of the virus. But, the idea of being propelled towards an innovative, digital-first, cashless society is also compelling.

Has cashless gone viral?

Recent months have forced the world online, leading to a surge in e-commerce with UK online sales seeing a rise of 168% in May and steady growth ever since. In fact, PPRO’s transaction engine, has seen online purchases across the globe increase dramatically in 2020: purchases of women’s clothing are up 311%, food and beverage by 285%, and healthcare and cosmetics by 160%.

Alongside a shift to online shopping, a recent report revealed 7.4 million in the UK are now living an almost cashless life – claiming changing payment habits has left Britons better prepared for life in lockdown. In fact, according to recent research from PPRO, 45% of UK consumers think cash will be a thing of the past in just five years. And this UK figure reflects a global trend. For example, 46% of Americans have turned to cashless payments in the wake of COVID-19. And in Italy, the volume of cashless transactions has skyrocketed by more than 80%.

More choice than ever before

Whilst the pandemic and restrictions surrounding cash have certainly accelerated the UK towards a cashless society, the proliferation of local payment methods (LPMs) in the UK, such as PayPal, Klarna and digital wallets, have also been a key driver. Today, 31% of UK consumers report they are confident using mobile wallets, such as Apple Pay. Those in Generation Z are particularly keen, with 68% expressing confidence using them[1].

As LPM usage continues to accelerate, the use of credit and debit cards are likely to decline in the coming years. Whilst older generations show an affinity with plastic, younger consumers feel less secure around its usage. 96% of Baby Boomers and Generation X confirmed they feel confident using credit/debit cards, compared to just 75% of Generation Z[2].

Does social distancing mean financial exclusion?

As we hurtle into a digital age, leaving cash in the rearview, there are ramifications of going completely cashless to consider. We must take into consideration how removing cash could disenfranchise over a quarter of our society; 26% of the global population doesn’t have a traditional bank account. Across Latin America, 38% of shoppers are unbanked, and nearly 1 in 5 online transactions are completed with cash. While in Africa and the Middle East, only 50% of consumers are banked in the traditional sense, and 12% have access to a credit card. Even here in the UK, approximately 1.3 million UK adults are classed as unbanked, exposing the large number of consumers affected by any ban on cash.

Even when shopping online – many consumers rely on cash-based payments. At the checkout page, consumers are provided with a barcode for their order. They take this barcode (either printed or on their mobile device) to a local convenience store or bank and pay in cash. At that point, the goods are shipped.

There are also older generations to consider. Following the closure of one in eight banks and cashpoints during Coronavirus, the government faced calls to act swiftly to protect access to cash, as pensioners struggled to access their savings. Despite the direction society is headed, there are a significant number of older people that still rely on cash – they have grown up using it. With an estimated two million people in the UK relying on cash for day to day spending, it is important that it does not disappear in its entirety.

Supporting the transition away from cash

Cashless protocols not only restrict access to goods and services for consumers but also limit revenue opportunity for merchants. While 2020 has provided the global economy with one great reason to reduce the acceptance of cash, the payments industry has billions of reasons to offer multiple options that cater to the needs of every kind of shopper around the world.

Whilst it seems younger generations are driving LPM adoption, it is important that older generations aren’t forgotten. If online shops fail to offer a variety of preferred payment methods, consumers will not hesitate to shop elsewhere. With 44% of consumers reporting they would stop a purchase online if their favourite payment method wasn’t available – this is something merchants need to address to attract and retain loyal customers.

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UnionPay increases online acceptance across Europe and worldwide with Online Travel Agencies

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UnionPay increases online acceptance across Europe and worldwide with Online Travel Agencies 3
  • UnionPay International today announces that two of Europe’s leading travel companies, Logitravel and Destinia, have started accepting UnionPay.
  • This acceptance will enable users of the groups’ travel websites to make purchases using UnionPay payment methods.

The acceptance partnerships between the OTAs and UnionPay began in July 2020 for customers across 13 European countries and another 90 countries and regions worldwide.  The European countries covered by the agreements include the UK, Germany, France, Italy, Spain, Portugal, Norway, Denmark, Sweden, Austria, Switzerland, Hungary and Ireland.  The brands covered by these acceptances include Logitravel.com and Destinia.com which together deliver more than 8.5 million worldwide travel bookings each year covering flights, hotels, holidays, car hire and other experiences.

With over 8.4 billion cards issued in 61 countries and regions worldwide, UnionPay has the world’s largest cardholder base and is the preferred payment brand for many Chinese and Asian expatriates and students based in Europe, as well as an increasing number of global customers. These cardholders are also particularly attractive to the two OTAs.  Despite the impact of Covid-19, Logitravel and Destinia expect to see the demand for travel across the European continent as well as that between Europe and Asia return to growth in the coming years. They are now placing significant focus on offering more payment options and smoother payment services to meet this demand.

The partnerships incorporate UnionPay’s ExpressPay and SecurePlus technology, which will ensure seamless transactions for the customers, contained within a single process through the relevant websites.  UnionPay’s technology also provides for the requirement to authenticate transactions under the EU regulation Payment Services Directive 2 (PSD2) ensuring that sites will be compliant as soon as the relevant countries apply the requirements.

Wei Zhihong, UnionPay International’s Market Director, said: “This is a major partnership with two of Europe’s leading online travel companies.  Logitravel and Destinia are brands which have been at the forefront of e-commerce for many years and we are very excited to be working with them to extend their reach to new audiences. This highlights the work that we have carried out in ensuring that our technology provides effective solutions for the biggest e-commerce sites both in Europe and around the world. We look forward to announcing many more similar agreements in the near future.”

Jesús Pons, Chief Financial Officer at Logitravel Group said: “UnionPay has always been on our radar, and since travel has become a crucial part of its development, Logitravel felt it important to develop this important partnership. It really was an obvious decision for Logitravel since both companies share a passion for e-commerce and emphasising the payment experience for their customers.”

Ricardo Fernández, Managing Director at Destinia Group said: “We believe that this is the beginning of a really strong relationship.  Our discussions with UnionPay in reaching this partnership have demonstrated their understanding of the needs of major online merchants and their ability to deliver the highest quality systems.  We look forward to working together on further partnership as we move forward.”

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