Firms Run by ‘Demanding From Top Down’ More Likely to Fail, Says Ex-Wirecard CEO

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James Freis, the former US regulatory official tasked with running e-payments giant Wirecard as it collapsed over the summer, warned an audience of the risks of trying to run their businesses through a command-and-control approach — particularly in today’s rapidly changing economy.

“We’re in a world that is evolving faster than anyone could have anticipated years ago. If a management team is not looking to change, to evolve, to challenge the way that they’re doing things, they are going to fall behind, because the markets and the consumers and the service demanders are evolving,” Mr. Freis told a virtual corporate crime and regulation summit hosted by law firm A&L Goodbody.

During a crisis, Freis added, you need employees and advisers who are able to take responsibility for achieving results and to provide concrete recommendations. “The worst thing is someone coming and saying, ‘Well, that’s not my job’ or ‘We’ve never done that before’,” he said. “Well, frankly the reason you are called into a crisis meeting is because we don’t have a playbook.”

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Starling Talks With Mark Cooke and Simon Wills of ORX on the Future of Operational Risk Management

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Operational risk management failures continue to cost the banking industry billions and risk managers are looking for new tools that help to curb costs and avoid penalties.  ORX represents operational risk leaders among 100 financial institutions worldwide.  Its members report that solutions for the management of “conduct risk” is now a priority.

Simon Wills is Executive Director of ORX.  Mark Cooke is the organization’s recent past-Chairman and served as global head of operational risk for HSBC. We sat down with them to discuss the future of non-financial risk management and captured key take-aways in this 3-minute video clip.

By combining behavioral science with AI and organizational network analytics, Starling delivers insights into the relational dynamics among staff that lead to critical performance outcomes.  Starling’s predictive behavioral analytics platform empowers organizations to manage with foresight. 
Customers look to Starling to demonstrate proactive conduct risk management capabilities, to reduce risk and compliance costs, and to improve the performance of critical business and corporate functions. Learn more here.
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JP Morgan Fined $920m for Risk Management Failure

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A recent Deferred Prosecution Agreement (DPA) with the US Department of Justice saw JPMorgan fined and chastised for failure to manage operational risk. Terms of the DPA underscore the importance of determining root causes of misconduct, and making adequate use of data and data analytics to detect and mitigate conduct risks proactively.

JPMorgan avoided more severe penalties because it took steps after the 2015 settlement to overhaul its compliance program. The organization hired hundreds of new compliance officers and spent over $300 million on personnel and other compliance-related costs. “The company really engaged in a significant compliance uplift,” Brian Rabbitt, the acting assistant attorney general in charge of the department’s criminal division, said at the WSJ Risk & Compliance Forum. That was “part of the calculus for us in terms of not requiring an independent compliance monitor.”

Spending on non-financial risk management has exploded since the Financial Crisis. But, despite billions in annual spend on processes and systems for governance, risk and compliance (GRC), firms have faced hundreds of billions in punitive fines for operational risk management failures over the last decade.

But banks struggle to find software that identifies misconduct without generating a host of false positives. “You want a surveillance system to catch any potential issues,” she said. “You don’t want it to spit out thousands or tens of thousands [of alerts] that no compliance officer or even a phalanx of compliance officers is going to have time to review.”

Predictive technologies now make it possible to detect ‘leading indicators’ of behavior within standard data sets, providing a more timely, efficient and effective means of identifying and mitigating conduct risks proactively. These RegTech tools have caught the eye of bank regulators and leading firms are beginning to trial new approaches to the challenge of managing conduct risk.

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Wells Fargo Fires More Than 100 Workers for Abusing U.S. Aid

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Wells Fargo reports that it has fired employees suspected of improperly collecting coronavirus relief funds. The firm determined that its staffers had defrauded the Small Business Administration “by making false representations in applying for coronavirus relief funds for themselves,” according to an internal memo reviewed by Bloomberg. The bank’s memo said that it has “zero tolerance for fraudulent behavior.”

Between 100 and 125 people were terminated, according to a source with knowledge of the situation. These findings add to evidence what may prove to be broad abuse of the CARES Act relief monies. The SBA has said that it has “stringent fraud-protection safeguards” in place, but adds that it was under enormous pressure to move money into the economy quickly to help offset the impact of the coronavirus pandemic.  A Bloomberg Businessweek analysis of SBA data in August identified at least $1.3 billion in suspicious payments.

Considered against the backdrop of recent enforcement actions that have impacted JP Morgan and Citi, this latest news of further employee misconduct at Wells Fargo is likely to invite closer attention from regulators and Congress.

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Coronavirus Elevates Compliance Risks for Most Companies

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According to a recent Wall Street Journal survey of compliance professionals, organizations are facing new and amplified compliance risks, while the coronavirus pandemic has made many compliance programs far less effective.

Survey data shows that 90% of companies have experienced new risks or that existing risks have been exacerbated by the pandemic. Close to half of respondents reported both.  One in four said compliance programs have taken a hit during the pandemic. As a result of these challenges, compliance and risk staff are forced to rethink their internal safeguards.

Investigations and risk assessments have become almost fully remote as a result of the pandemic, and many companies are looking to technology to make their compliance programs more efficient in the long term.  More than 75% of survey respondents said they now rely more on data and advanced tools to manage risk and compliance. 
With ‘work-from-home’ protocols expected to continue for some time, there is immediate risk that these compliance and risk management challenges will equate to bad outcomes which may harm consumers and result in further punitive enforcement actions against firms on the part of bank supervisors.  
These trends highlight the opportunity being seized by ‘regtech’ firms, and it is notable that most major bank regulators have stood up ‘innovation labs’ to help promote the trialing of new risk governance methodologies.

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