The recent 1MDB scandal that stretched from the East to the West is a major example of misconduct in the financial industry. It is also indicative of an endemic culture of misconduct within the industry itself. Several banks and higher-ups in government were involved and yet the few have been charged or convicted of any crime. The reason is that while the financial system is meant to prevent scandals such as this the reality is that those tasked with governance are incentivized to look the other way because the ones they are aiding and abetting in allowing these crimes to happen are the ones who also have the power the prosecute. Thus, the corruption extends from the industry to the state. It is very much a situation of scratch-my-back-and-I’ll-scratch-yours.
1MDB was set up as a massive sovereign wealth fund that was used as a slush fund by various well-connected individuals. The principals in the 1MDB scandal were Jho Low, Prime Minister Najib Raza and his step-son, and the heads of the world’s big banks, including Goldman Sachs, Deutsche Bank, BSI and others (Brown, 2020). The fraud could have been stopped had compliance officers in the banks been allowed to do their jobs, but as Brown (2020) notes, they were either ignored anytime they attempted to raise red flags about transactions or they were removed from their posts by the heads of the firms, as was the case with the Singapore branch compliance officer of Goldman Sachs, who reported suspicious activity in the fund and argued that Goldman should investigate. Instead, Goldman removed the man from his post. Goldman executives, such as Gary Cohn, who profited handsomely from the 1MDB scandal (yet refused to pay back any of his bonuses once the scandal was uncovered and executives were urged to give back their profits to help defer the fines and settlements the bank was obliged to pay), were not holding their employees accountable—unless those employees were compliance officers who actually did try to do what they were supposed to do, which was hold the bank’s employees accountable. This type of corruption goes straight to the top, as Brown (2020) points out, and it was enabled because the heads of the big banks work closely with the heads of state, as everyone has a finger in the pie and is getting some kind of reward for enabling the fraud.

The incentive for executives to create a culture of looking the other way instead of insisting...…executive action. Compliance should, to some extent, be initiated by an independent third party that is not exposed to the corrupting influences of the internal chain of command. Political control should also never be allowed to happen within a bank, because it is that kind of influence that is leveraged and used to commit and cover over crimes (Jones, 2020). As Jones (2020) notes, watchdog agencies and investigative teams should be protected from political influence and interference as well. Accounts of shell companies should be monitored more closely and internal auditing conducting by third parties with the power to blow the whistle publicly on areas where major red flags are showing should also be a practice better established. To cultivate a better system of ethics and compliance, Jones (2020) also argues that “control through a rigorous process of verification must be exercised on the remittances of money to outside bank accounts, and whether such remittances are intended to fund approved projects. Such controls can reduce the loopholes by which money is embezzled” (p. 68). This would effectively help the firm to solve the problem of poor compliance in a most practical and pragmatic manner while allowing it to still operate internationally—albeit more ethically.

References

Brown, C. R. (2020).…