National culture can affect banks' operational risk

In the wake of another multibillion-dollar rogue trading loss, the question of the root causes of fraud has surfaced yet again. As well as improved controls and trade monitoring, attention has already turned to the role of internal culture in promoting or preventing fraud and other financial crimes: the ‘fraud triangle’ consisting of rationale, opportunity and pressure has been widely discussed.

But banks also need to consider the importance of the external culture in which they operate – national culture could play an important role in determining their staff’s behaviour.
“You have to think about the international aspect of fraud,” says John Smart, a fraud and investigation and dispute services partner at Ernst & Young in London. “If you’re running a bank or an organisation in the UK, for example, you will tend to follow an anglocentric view of the world, and if you’re on the ground in an emerging market the world is very different.”

Smart says that in large financial centres such as London, New York or Singapore the incidences of internal fraud might be similar – international financial centres effectively operate in a common way due to the close links between them. But elsewhere, the cultural factors surrounding fraud could be different.

“There will be a different external environment in relation to what types of fraudulent activity might be seen as being acceptable or not. The way you do business will be different,” he notes.

Ernst & Young's European Fraud Survey 2011 found a quarter of its board-level respondents whose company had an anti-bribery policy in place felt their company should be “more flexible to local needs” to accommodate local culture. This belief is even reflected in law, with informal but legal ‘facilitating payments’ to local officials being acceptable under the US Foreign Corrupt Practices Act as an essential part of doing business in some countries, even though they would be unacceptable in the US itself.

And others think that it’s important to understand how much of an impact local culture can have on a firm’s operations.

“The tone at the top within an organisation is a good indicator of the likely behaviour you’ll see within it,” says Michael Zeldin, global leader of anti-money laundering at Deloitte in New York. “If the tone set by country leadership reflects honesty, integrity and adherence to regulations, for example, and those things are an important component of the national identity, then I think it trickles down into the culture of corporations as they drive it into the business lines of their organisation. The more these things matter and are articulated as national and corporate values, the more you’re likely to affect behaviour.”

The power of national culture can be seen in Sweden. Locals credit the country’s size and culture with its relatively low incidence of financial crime.

“In small countries such as Sweden institutions are much stronger than individuals,” says Lars Hansen, chief risk officer at SEB. “Swedes are in general more consensus-driven than many other nationalities. We want everyone on board, as this creates an element of loyalty.”

Arshamian agrees. “Sweden is a small country when it comes to the number of people. A lot of people know each other,” she says. “I think it’s a safe assumption to say reputation is a control mechanism. That is reflective of Swedish culture to a degree.”

Sweden’s banking industry also reflects the efficiency that is part of the Swedish culture, according to Johan Hansing, chief economist at the Swedish Bankers’ Association (SBA): “For Swedish banks it’s important to be efficient,” he says. “They really don’t like to be forced by regulators to have four IT systems for example, they like to just have one.”

Swedish banks also have a culture of being traditional and conservative, according to Hansing. This extends into the working culture, which might help to prevent internal fraud and excessive risk-taking.

“Swedish banks are quite traditional,” he says. “A bank managing director once said to me that we don’t use instruments we don’t understand here in Sweden. That’s a good way to explain what we are like, and also why we weren’t so affected during the financial crisis.”

A preference for security over rapid growth and high returns has had other effects on the structure of the country’s banking industry.

“Handelsbanken hasn’t grown by continuously buying up other banks,” says Hansing. “It has grown organically by opening branches. Which means it has to be patient and its shareholders never expect rapid growth in its share value, but they know they will always be safe. Plus the bank always has a lot of liquid assets. This culture means excessive risk-taking is avoided.”

This conservatism has been reinforced in Sweden’s recent past: the country suffered a financial crisis between 1990 and 1993, when the country’s housing market collapsed. “One lesson for us from our crisis was about risk-taking,” says Hansing. “Banks learnt that you have to look at the customer’s ability to pay and not the value of the house.”

Hansing believes Swedish conservatism and the lessons learnt from its own crisis helped it to avoid getting caught up in the global financial crisis of 2008.

“Leading up to the 2008 crisis, a lot of new products appeared on the market in other countries – fixed loans, flexible loans, 125% mortgages – and we were criticised in Sweden because we were so traditional,” he says. “Other jurisdictions asked us at meetings why we didn’t have these products, but our customers never queried it.”

Across the country, inside and outside the financial sector, corruption is not seen as a big problem in Sweden – it enjoys the second highest rating in the 2010 Corruption Perception Index. This doesn’t come as a surprise to its banking sector. “If you talk to banks in some parts of the world, they will say 80% of their loss data is from internal crime, whereas here in the Nordics it is a much smaller proportion,” says Anders Meinert Jørgensen, chief operational risk officer and head of group operational risk and compliance at Nordea in Stockholm. “You have to think about how corrupt the country you live in is, as internal fraud is highly correlated to this.”
Arshamian of Finansinspektionen agrees. “I think it’s fair to say we have very little corruption and I think that culture is definitely part of the explanation.”

Deloitte’s Zeldin adds: “If you think of a culture where corruption is the norm and people are behaving in a selfish way, then that sets the example,” he says. “People will feel that if the people at the top are behaving that way then either it’s okay or even if it’s not okay, they’re doing it, so why shouldn’t I?”

However, Arshamian warns it’s important to keep the global nature of the industry in mind. “Even though we Swedes haven’t suffered from this kind of problem, we must remember that the systems we’re building are more and more global, so we need to be aware of new potential threats. We need to be prepared for this, and cannot just assume because it’s not in our culture it won’t happen to us.”

Jørgensen of Nordea agrees. “The trading desk at Nordea, and most other banks, is getting more and more international. As a consequence, any distinctive national traits mean less and less.”

And others agree the global nature of today’s workforce means various cultures are operating in banks across the world. “You might find that culture is changing over time,” says Richard Squire, a managing partner at the Crossbridge Consultancy in London. “You need to take that into account as people from different backgrounds come into the organisation. That could reduce the level of consistency of the culture.”

There is also a risk that relying too heavily on culture breeds dangerous complacency. “If a major fraud hasn’t happened in a particular location or institution, an institution might not put enough emphasis on the sort of controls you need to prevent fraud in an increasingly risky environment globally,” says Squire. “In spite of national culture, other risk factors exist globally.”

The SBA’s Hansing warns Sweden is not without controversy in its financial sector. Last year HQ Bank had its licence revoked by the Finansinspektionen for mis-calculating its market risk loss-absorbing capacity to the tune of Skr1.17 billion ($175 million).

The regulator claimed HQ’s financial position had been reported inaccurately. It also said the bank had taken risks that were so large they compromised its survival, and that its board and managing director had not limited its risk-taking as stipulated by Swedish law. A correct valuation of HQ’s financial position would have shown it had been undercapitalised from 2008 onwards. The miscalculations meant HQ violated accounting and capital requirement regulations.

It is unclear as to whether the miscalculations were intentional or not. Criminal proceedings of suspected accounting fraud and fraud are under way by the Swedish Economic Crime Authority.
“We mustn’t forget that these things can happen here,” says Hansing. “The HQ case was not like UBS – not a single person that tried to manipulate the bank. This was a group of people who had given an incorrect vision of the company to the shareholders.”

Even in Sweden, fraud is rare, but not unknown. “Individual motivational factors can override culture,” says Squire.

SEB’s Hansen points out: “Usually if there’s an internal fraud there’s a personal tragedy, so regardless of culture, you must have robust internal controls.”