Old tricks, new scandals

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Sat, 1 Aug 2020 Source: Bernard Otabil

My concentration is on the scandalous news stories about Wirecard AG - the once colossal global payment processing company - was a catch to explain the wider problem of how morals drop when money is in the offing.

I explained, and l hope you got the drift too, how Wirecard, a company which had footprints in major countries, including Germany, UK and China, had to file for insolvency on June 25, with funds of almost 2 billion euros unaccounted for.

In actual fact, the debate, and investigations, about the full details on what actually went wrong at the company is still ongoing.

Even though analysts, commentators and observers with interest in financial market issues have offered some (good) reasons about what might have gone wrong (some of which was explained in the last edition), there are still indications that the issues surrounding the collapse of the company may not be due to just a “few bad apples” but that something was rotten in the entire barrel.

The jury is still out on this, and certainly we will all know the verdict once more details about this unfolding story are made public.

As l reflected on the Wirecard AG story in the course of the week, I thought it wise to go back to

some of the past misconduct in financial markets that l have come to know over the years, some dating back to more than 1,000 years ago.

There was this powerful recollection of stories told about how Chinese merchants, more than a 1,000 years ago, had used a variety of schemes to hide trading profits, obviously to avoid taxes. In fact, some of these stories were issues taught in class, and the peg was always about how misconduct in financial markets had existed as long as commerce had existed.

In other words, and by inference, so long as there are businesses, and there are people suffering from stunted moral development, there is likely to be a scandal of some sort.

In history, there are stories about the great South Sea bubble in the 1720s, the mis-selling of railway stocks in the mid- 1800s, Barings Bank collapse of the mid 90s, the Great Financial Crisis (GFC) of the late 2000s, and the Euro sovereign crisis of some few years back.

In actual fact, there is a long record of rogues, fraudsters and embezzlers either trying to manipulate the market for their own selfish gains or to cause some form of trouble for the entire financial system - the reward of which sometimes is not clear.

Let me be clear at the outset that even though in most cases the media concentration is on the public funds that had to be used to bail out failed financial institutions, l am of the view that in all financial scandals or financial market misconducts, the bigger problem is always the loss of the social licence by institutions in positions of trust.

That can be extremely troubling, and does have a much wider effect of crippling or impairing financial services delivery in an economy. Should that happen, it becomes inimical to economic growth and ultimately affect human life through reduced standard of living.

Take the case of a regulated financial institution like Barings or Wirecard AG, the payment processing company - which actually veered into some banking activities also.

Society trusted these two institutions because they were regulated and under the rules of a supervisory body.

In fact, the expectation is that once you are regulated and involved in financial intermediation of some sort, your conduct would be above board.

For instance, the promise that depositors will have access to their funds on demand is sacrosanct. It is a promise that must be kept and jealously guarded to maintain trust in the entity’s relationship with clients.

Once this primary condition of trust is broken, chances are, the social licence issued by the public gets withdrawn somewhat. At best, the licence operates with some restrictions! And that is not in anyone’s interest.

So, is it the case that more regulations, rules and directives need to be introduced to supervise the affairs of financial institutions, companies and corporations or that there is the need for ethical standards and culture that self-reflects good practices at all times?

Well, certainly it is not all about rules, as rules alone will not make people ethically minded. Financial markets are dynamic, and business operations are not static either.

Processes evolve in response to the changing dynamics within society and specifically within markets, therefore, no regulator or supervisor can legislate for all circumstance.

This means that, regardless, there will always be an element of personal judgement that comes into play, and where your moral uprightness comes into question.

There are instances that market structures have presented opportunities for abuse, conflicts of interest and collusion.

Where systems of internal governance and controls are incapable of protecting the interest of the firm and society at large, market participants have exploited regulatory lapses to their own advantage.

Thus, in most of the identified scandals, in addition to the wider system failures, dearth of personal accountability also exacerbated the problems.

The US financial market, just like the European one, is highly regulated and yet some of the big scandals are traced to these markets.

Attempts to forestall the occurrence of financial scandals, such as the introduction of the Sarbanes Oxley and the most recent Dodd Frank Acts, aimed at improving regulation, market conduct and consumer protection, are yet to convince society that financial scandals will end someday.

If we should go by the Wirecard AG experience, then we are not out of the woods yet, as far as corporate scandals are concerned.

It is certainly not all about rules.

Columnist: Bernard Otabil