On Wachovia, Whistle-Blowers, and Incentives

3 Apr

I just read a very good article in the UK Guardian/Observer about how Wachovia enabled hundreds of millions (if not billions) of dollars of dirty money to flow through its various international operations.  I’ve seen much outrage (via twitter and other blogs) about this debacle, especially since the article relates the plight of one diligent whistle-blower who was silenced, and who experienced great personal distress for his efforts.  I wish I could say such secretive, illegal behavior on the part of Wachovia was unique to that firm, but unfortunately, it is not.  No.where.close.

I’ve seen bank and brokerage compliance/legal personnel spend infinitely more time critiquing an address change on the account of a U.S. citizen than on approving accounts/transactions for blind off-shore corporations with mailing addresses in Miami.  Think “ABC Import/Export” with a P.O. Box in Miami and a legal address in the British Virgin Islands.  Nothing potentially shady about that, right?

Sure, there are KYC (Know Your Client) and AML (Anti-Money Laundering) policies, procedures, and systems in-place, but in my experience, they’re analagous to many of the “Risk Management” policies, procedures, and systems that were supposed to keep investment banks from running themselves – and the global financial system – into the ground.  Those responsible for enforcement just simply are not empowered nor incentivized to stop the actions of the producers, those who drive revenue for the firm.  And, if you produce enough revenue, you can bet your ass that The Powers That Be will make sure to keep compliance off your back, excepting clearly and painfully illegal transactions (and even then, sometimes such things get through)…

It all comes down to incentives, and it starts all the way at the top of both government and the executive ranks and oozes down into to the deepest trenches.  So long as both government and executive leaders – and their underlings – are largely rewarded based on maximizing short(er)-term results, we should be completely unsurprised that neither are concerned with making tough choices and sticking to them for the long-run.

Few people posess the fortitude and masochistic personality required to pursue years-long regulatory/enforcement efforts.  Like lawyers at the SEC, why bother risking your career and health pursuing a big, difficult case when you can “play the game” and jump to a more lucrative gig in the private sector after 5, 10, or however many years?  Many – if not most – tasked with compliance/legal duties have no incentive to “rock the boat,” so-to-speak.  In fact, they actually have negative incentives for so-doing, similar to those experienced by the Wachovia whistle-blower in the Guardian/Observer article.

Of course, the ultimate blame lays not with the regulators, enforcers in either government or the private sector, nor does it lie in the C-suites on Wall Street or in D.C, regardless of how easy it is to point fingers there.  No, the only ones with the ability to affect any change are the shareholders and voters.  The shareholders who elect the members of these firms’ Boards of Directors, the same directors who have the ability and duty to make sure their firms’ Executives are running the firm with the best interest of the shareholders, the same shareholders who are hurt when firms fail to act within the Law.  And voters, who elect the Legislature, the same Legislature that is currently constricting the SEC’s budget and thereby hampering its ability to handle the tasks assigned it both before and as a result of Dodd-Frank.

Surely, the flaws in the system are both myriad and complex, but whining about them does not them change.  Action, concentrated and widespread action are the only thing that stands a chance of making a difference.  Absent that, we should be unsurprised that the status-quo, for lack of a better word, sucks.

After all, The only thing necessary for the triumph of evil is for good men (and women!) to do nothing.

* Pardon some generalizations, this is not intended to be a technical discussion of the various issues discussed, but rather an observational essay.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: