Fraud Advisory Panel Ninth Annual Review 2006-2007
Ethical is bestthe defencebehaviour againstfraud It’s all about choices
LOW RES PROOF ONLY Ethical behaviour is rooted in individual choices but that’s not the whole story. Government, business and media supply inspirations and incentives that help set the tone of our society. Some of these are making an inadvertent but powerful contribution to the growth of fraud.
LOW RES PROOF ONLY Contents
The Fraud Advisory Panel is an independent body 2 Chairman’s Overview: with members from both the public and private The Best Defence sectors. Its role is to raise awareness of the immense human, social and economic damage caused by fraud 3 About The Panel and to develop effective remedies. 3 Programme 3 Joining The Panel works to: 3 Corporate Members 4 Trustees • originate proposals to reform the law and public policy, with a particular focus on fraud 6 Public Policy: investigations and prosecutions. “A Once in a Generation Chance” • Advise business and the public on prevention, 6 At least £20 Billion a Year 6 Aspirations and Realities detection and reporting. 7 Six Cheap and Simple Steps • Assist in improving education and training in business and the professions. 8 Ethics and Fraud • Establish a more accurate picture of the extent, 9 The Social Context causes and nature of fraud. 9 Inspirations and Incentives 9 A Zone of Tolerance The Panel has a truly multi-disciplinary perspective. 10 Marginalising Ethical Criteria No other organisation has such a range and depth 10 Getting Away With It of knowledge, both of the problem and of ways to 11 The Business Context combat it. 11 The Role of Corporate Culture 12 Creating an Impression The Panel was established in 1998 through a public 13 A Case Study spirited initiative by the Institute of Chartered 14 Lessons for the Rising Generation Accountants in England and Wales. It is now a 16 Strengthening the Ethical Framework registered charity and company limited by guarantee, 16 Some Building Blocks funded by subscription, donation and sponsorship. 18 Ethics in Organisations 20 Common Sense v Red Tape
LOW RES PROOF ONLY Chairman’s Overview The Best Defence
The Panel has dedicated its 2007 annual More law and regulation is not the answer. My fellow Trustees and I are grateful to review to the theme of promoting ethical Setting high standards of behaviour, not them all, and for the support of our Senior behaviour. We feel that high standards in least towards customers and employees, Executive Mia Campbell and her colleague personal, as well as organisational, life are should be a priority for every governing Tamaryn Thorburn; Martin Robinson the best defence against fraud and that a body, from the smallest enterprise to the our consultant on Education, Events climate of corner-cutting and indifference largest conglomerate. In this way, boards of and Training; and Simon Pearce, who to others allows it to grow. directors will give a clear signal that prepared this Review. A particular word of not only is good behaviour expected but thanks goes to the Institute of Chartered Experience tells us that too many bad that it will be rewarded and low standards, Accountants in England and Wales (which examples are being set and excused in let alone downright dishonesty, will not helped found the Panel and has remained its business and the public sector, sometimes be tolerated. strongest supporter) and the Association of at the very top. When lip service is paid to Certified Fraud Examiners. ethical behaviour without attempts to instil Of course very many people in business and an ethical culture, organisations become public bodies care deeply about standards. more and more vulnerable to fraud from The Fraud Advisory Panel exists only within (already the source of the great through the support of individuals and majority of financial crime hitting the organisations who see fraud as a human Rosalind Wright CB QC corporate sector). and social issue as well as a financial one. October 2007
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About The Panel
The Panel is governed by a Board of • A special conference focused on fraud and • Networking and opportunities to Trustees and chaired by Ros Wright, misconduct in research. Speakers included exchange information with experts from a former Director of the Serious Fraud experts from the scientific, biomedical, the public sector, policing, accountancy, Office (see biographies on pages 4-5). academic and regulatory fields in Britain the law, business, financial institutions, and America, as well as the scientific press. IT, security and academia. Programme Further information on the Panel’s activities • Preferential rates and early notification 2006-2007 has been the Fraud Advisory is available at www.fraudadvisorypanel.org. of all conferences and seminars (some Panel’s most productive year to date. events are free to members). Highlights included: Joining • Access to the members’ website with • playing a leading role in debate on the People and organisations join the Panel reports of internal meetings and an Fraud Review by setting out detailed because they care about fraud, want to online searchable database. proposals on the law, policing, the courts do something about it, and exchange and the machinery of government. intelligence, information and insights Corporate membership includes up to 20 in the process. named employees entitled to all the above • Making expert responses to government benefits. The Panel also offers a free one- consultations on judicial powers and As of October 2007 there were 175 hour training session on a fraud-related action against organised and financial individual and 47 corporate members (see subject of your choice. Corporate members crime, as well as submitting evidence to the below) plus 26 observer organisations, are listed on the Panel’s website and in its House of Common’s Home Affairs Select mostly public sector bodies. All members are annual review. Individual membership costs Committee enquiry into police funding. required to conform to a Code of Conduct. £53 a year; corporate membership costs £1,060. For more information contact the • Highlighting new issues such as the legal Benefits of membership include: Panel on 020 7920 8721 or membership@ loopholes exposing web-based virtual fraudadvisorypanel.org. communities to fraud. • influencing public policy via the Panel’s research and proposals. • Staging more events, with bigger audiences, and on a wider range of issues, • Participation in multi-disciplinary working than ever before. These included regional groups (Investigation, Prosecution and workshops on the role of the accountant Law Reform, Cybercrime and Education, in fraud risk management; seminars on Events and Training) and ad hoc groups consumer bankruptcy, corporate identity on topical issues. fraud, tax, cybercrime and retail fraud.
Corporate Members
192.com Business Services, Accountants’ Joint Disciplinary Scheme, Alix Partners Ltd, Association of British Insurers, Association of Certified Fraud Examiners, Association of Certified Fraud Examiners (UK Chapter), Association of Chartered Certified Accountants, AVIVA plc, Baker Tilly, BDO Stoy Hayward LLP, Bishop International Ltd, BSKYB Ltd, Cadbury Schweppes plc, Calyon, Capcon plc, Chantrey Vellacott DFK LLP, CIFAS - the UK’s Fraud Prevention Service, Control Risks Group, Daylight Forensic & Advisory, Deloitte & Touche LLP, Denton Wilde Sapte, Ernst & Young, Experian Decision Analytics, Finance & Leasing Association, Financial Services Authority, Grant Thornton UK LLP, HBOS plc, Institute of Chartered Accountants in England & Wales, Institute of Chartered Accountants of Scotland, KPMG LLP, Law Society of Scotland, Legal & General Group plc, Lloyds TSB Bank plc, McGrigors LLP, Merrill Lynch Europe plc, MHA Consulting, National Audit Office, NHS Counter Fraud & Security Management Service, OVAG Limited, PKF (UK) LLP, PricewaterhouseCoopers LLP, Protiviti Ltd, Prudential plc, Royal & SunAlliance plc, RSM Bentley Jennison, Solicitors Regulation Authority, UBS AG
LOW RES PROOF ONLY Trustees
Ros Wright CB QC Steven Philippsohn Felicity Banks
Chairman of the Panel since May 2003. Deputy Chairman of the Panel and Head of Business Law at the Institute of Chairman, Supervisory Committee, OLAF Chairman, Cybercrime Working Group; Chartered Accountants in England and (the European Union’s Anti-fraud Office); founder and Senior Partner, PCB Litigation Wales; represents the Institute on economic independent member, DBERR (formerly LLP, conducting fraud and asset recovery crime issues; represents the accounting DTI) Legal Services Group and Insolvency civil litigation; Co-Editor of the UK profession on HM Treasury’s Money Service Steering Board; Vice-Chairman, Manual of the Association of Certified Laundering Advisory Committee. Jewish Association for Business Ethics; Fraud Examiners; member, editorial Bencher of the Middle Temple; Director, boards of E-Commerce Law & Policy and Bill Cleghorn Serious Fraud Office 1997-2003; General Inside Fraud Bulletin; UK representative Counsel and Executive Director, Investor member of the Fraud Network of the Protection, Policy & Legal Division at the International Chambers of Commerce; Securities and Futures Authority 1987- member, Home Office panel on the future 1997; Non-executive Director, OFT of internet crime. 2003-2007; Head of the DPP’s Fraud Investigation Group for the City and Metropolitan Police areas 1983-1987; Partner, Financial Crime Investigations, recipient of the Association of Certified Forensic Services and Corporate Recovery Fraud Examiners’ Cressey Award 2007 for at Kinetic Partners LLP; Insolvency Licence lifetime achievement in the detection and Holder; Fellow of the Association of deterrence of fraud. Business Recovery Professionals; former Partner, UK Fraud Investigation Group, PricewaterhouseCoopers; lecturer on fraud related issues and money laundering.
Dr Stephen Hill Will Kenyon James Perry
Former Detective Chief Superintendent with the Metropolitan Police and Commander in Charge of its Economic and Specialist Crime Unit; former Chair of the Association of Chief Police Officers’ National Financial Investigation Working e-Crime & Fraud Manager, Chantrey Partner in PricewaterhouseCoopers’ Group; represented the police in the Vellacott DFK LLP; adviser to SMEs Forensic Services Group; founding studies which led to the Proceeds of and charities; trains police forces, private head of Forensic Investigations, Crime Act 2002 and Money Laundering sector fraud units and major banks; PricewaterhouseCoopers GmbH, Germany Regulations 2003. lecturer on fraud awareness; steering 1998-2001; specialises in the prevention, committee member, London Fraud Forum; detection and investigation of fraud and Associate of the Association of Certified financial crime; involved in investigations Fraud Examiners. and recovery actions for some of the most significant fraud cases of the last 20 years.
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Ken Farrow Jonathan Fisher QC Neil Griffiths
Director of Fraud Services, Control Risks Specialising in white collar crime, Chairman of the Panel’s Investigation, Group, providing fraud and anti-money regulatory and disciplinary cases at 23 Prosecution and Law Reform Working laundering preventative and investi- Essex Street Chambers; former Standing Group; Partner in the Reconstruction gative services. Formerly Head of the Counsel (Criminal) to the Inland Revenue and Insolvency Group at Denton Wilde City of London Police Economic Crime at the Central Criminal and London Sapte, specialising in contentious and fraud Department and Chair of the Association Crown courts; legal panel member of related cases; former Vice-Chairman of of Chief Police Officers’ National Working the Accountancy & Actuarial Discipline the Creditors’ Rights Committee of the Group on Fraud. Board; member of the International Bar International Bar Association. Association’s Anti-Money Laundering 3rd Directive Implementation Group and Working Group on Industrial Espionage; co-author of The Law of Investor Protection (Sweet and Maxwell); Visiting Professor in Corporate and Financial Crime at the London School of Economics; steering committee member, London Fraud Forum.
Alex Plavsic Monty Raphael Martin Robinson
Head of Financial and Fraud Investigation Head of Fraud and Regulatory Practice, The Panel’s Education and Training at KPMG Forensic; conducted independent Peters & Peters (Senior Partner until Consultant and Chairman, Education, reviews for regulators including the Bank April 2005); conducted fraud enquiries Events and Training Working Group; of England, the Financial Services Authority for regulators, Inland Revenue and HM independent risk and audit consultant; and government departments; investigated Customs & Excise; Director, Transparency Training Development Adviser to the major fraud cases including Polly Peck and International (UK); Visiting Professor Institute of Internal Auditors UK and Group Torras. in Law at Kingston University; former Ireland; Audit Adviser to the Institute of President, London Criminal Courts Chartered Secretaries and Administrators. Solicitors Association; founder of the Business Crime Committee of the International Bar Association and Chair of its Anti-Corruption Working Group; Honorary Solicitor to the Howard League for Penal Reform.
LOW RES PROOF ONLY Public Policy: “A Once in a Generation Chance”
“It used to be said ‘no one walks down the street in fear of being embezzled’. Well, increasingly they do. Whereas once the average Briton dreaded being burgled or having their car broken into, they are now worried about identity fraud, mass marketing scams and other forms of financial crime that have a serious impact on their lives.” Mike Bowron, City of London Police Commissioner and Lead for Economic Crime, Association of Chief Police Officer’s (ACPO), February 2007.
Speaking a month later about the Government’s response to the The Panel agrees with the Commissioner’s assessment. Whitehall Fraud Review, Commissioner Bowron said “it may be another ten is often compared to a supertanker which can only be re-routed years until this area is revisited in the same depth… this is a once after a prolonged effort. Wrong decisions now may set a defective in a generation chance to make a difference”. course for years to come.
At Least £20 Billion a Year Aspirations and Realities
In March ACPO published The Nature, “Recent research shows that in monetary funding for police fraud investigations. Extent and Economic Impact of Fraud in the terms the harm it causes is on a par with Professor Alan Doig points out that “fraud is UK. Drawing on a wide range of published Class A drugs…Fraud is a serious threat reckoned to be responsible for almost half sources the report showed that financial to the UK.” Lord Goldsmith, then Attorney the estimated value of all criminal activity crime now costs a bare minimum of £13.9 General, February 2007. investigated by the police but the police billion a year, increasing to £20 billion devote less than 3% of their staff to its when income tax and EU-related fraud “Our work on fraud recognises that, if it investigation”. are taken into account. is left unchecked, it damages not just the financial services sector but the wider The number of police officers in fraud This amounts to £330 for every man, economy and the reputation of the UK as a squads (apart from the special case of the woman and child in the country. Individuals whole.” Ed Balls, then Economic Secretary to the City of London) fell from 869 in 1995 lost a minimum £2.75 billion and business Treasury, February 2007. to only 404 in 2004. The Review warned £3.7 billion in 2005. The public sector that “a continued decline in fraud squad was defrauded to the tune of at least £6.8 There is “a lack of willingness by police resources would inevitably affect the service billion in 2005-2006. forces to accept reports of fraud outright” police provide to victims, and the capacity because of “a lack of capacity…even when of the UK to protect itself from fraudsters”. One of the drivers of fraud, and perhaps reports are taken, little is done with them… its most dangerous feature, is the extensive The chance of a low or medium value fraud Pledges to establish a National Fraud and growing role of organised crime with against the private sector being investigated Strategic Authority, National Fraud its methods of intimidation and violence. is very small.” Government Fraud Review, Interim Reporting Centre and National Lead Force KPMG reports that over 40% of all fraud Report, March 2006. in 2008 are important steps forward but cases worth over £100,000 brought to they will make little difference to the court in the second half of 2006 were The present government has done more situation on the ground for some time. carried out by professional criminals. to combat financial crime than any of its In the absence of a more comprehensive predecessors. But the contrasting quotations approach they will have little impact even show the gap between aspirations and in the long-term on the huge, and hugely reality. This is largely because Whitehall has damaging, number of frauds worth up to for many years failed to provide adequate £100,000.
LOW RES PROOF ONLY Public Policy: “A Once in a Generation Chance”
Yet the Review calculated that doubling Unshackling Investigations and Prosecutions Focussing Political Interest the number of officers dedicated to fraud The CPIA (Criminal Procedure and The scale and growth of fraud makes it would cost no more than £14.5 million Investigation Act 1996) Code of Practice a major national issue but one that still a year. Attacking fraud is excellent value denies an investigating authority the right lacks adequate political engagement by for taxpayers’ money. In 2004-2005 the to close down unpromising lines of enquiry. the nation’s representatives. A Cabinet NHS Counter Fraud Security Management Investigators are therefore obliged to Committee is needed to drive and co- Service spent less than £18 million and collect huge volumes of material. ordinate cross-departmental initiatives. saved £189 million. The police-private sector Dedicated Cheque and Plastic Card The Fraud Review noted that up to 80% The NFSA should make an annual progress Unit, which fights card fraud, cost £3.7 of investigators’ and prosecutors’ time report to Parliament. Its work, and fraud million and saved £10 million. in serious fraud cases can now be spent policy across the board, would benefit dealing with unused evidence. Inadvertent from scrutiny by a Joint Committee of Six Cheap and Simple Steps non-disclosure of unused material can also both Houses, MPs being supplemented by lead to a conviction being overturned even peers with professional experience of law Much can be done even within present after a guilty plea. enforcement, the courts and business. spending limits. The Panel recommends that ministers take the following steps Two reforms are essential. Investigating Helping Victims, Improving Reporting to complement the planned three new authorities should have the right to seek The Government has proposed that police institutions. court approval for a preferred line of stations should no longer take reports enquiry. Defence counsel should have to from fraud victims, who would instead be Saving Fraud Squads satisfy a court that unused material held by directed to a new national reporting centre. Fraud investigations suffer because they the prosecution is relevant to a case. This will inconvenience and distress people. do not feature on the Home Office’s list It will also send a message that financial of police priorities. But even without Coherent Research and Policy crime is unimportant and therefore reduce new money existing squads could be Development reporting. Though the Panel supports plans saved by ‘mainstreaming’ fraud as a Key The Panel strongly supports the for a National Fraud Reporting Centre it Performance Indicator within the National Government’s plan for a National Fraud urges the Government to reconsider this Community Safety and Policing Plan. Strategic Authority (NFSA). A key to particular proposal. This would send a powerful signal to chief its success is the creation of an internal constables that financial crime must not be multi-disciplinary advisory unit, a A roundtable convened by the Panel marginalised. ‘think tank’ researching and developing in 2006 confirmed that little help is recommendations for improved anti- provided to victims of fraud, largely Putting Fraud on Local Agendas fraud measures, whether legislative, because their needs are little understood. The Panel has long urged the establishment administrative or operational. There is an Whitehall should commission research of local Police and Community Fraud urgent need for a standing body dedicated to ascertain what services are required Liaison Groups, with members drawn to a coherent overview of the issues. The and appropriate methods of delivery. from chambers of commerce, professional unit would provide support and advice A proactive approach would encourage associations, local authorities, victims to the NFSA’s Board and stimulate public reporting and improve intelligence about support groups and other interested parties. interest via publication of its reports. fraudsters and their methods. These would feed reports and concerns to local police command units, allowing senior officers to take more informed decisions about resource allocation.
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andEthics fraud Ethical behaviour is our best defence against fraud. The laws and systems we look to for protection are themselves dependent on most people acting with integrity everyday of their lives. We usually take this for granted but it is the result of human choices, personal and collective, conscious and unconscious. An ethical society is not an inevitable state of affairs, it has to be worked for.
Discussing fraud without reference to ethical behaviour makes as little sense as talking about the economy without mentioning money. Yet we are often reluctant to highlight the connection. We worry about sounding ‘preachy’; we are aware of our own failings; we know the issues can be complex and the solutions difficult.
There is a place for such reservations but they can be taken too far. Undue silence on ethics can help us forget them, and nowhere more so than with money.
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The Social Context
Inspirations and Incentives A Zone of Tolerance
Being ethical is ultimately a matter of A large number of opinion surveys reveal • A 2005 MORI poll for the Institute of individual choice. Yet it would be absurd considerable tolerance for dishonest Business Ethics (IBE) showed that more to suggest that individual choices are behaviour that embraces low-level fraud. than half the workforce thought a “bit of uninfluenced by environment even though fiddling on expenses” was not as bad as they are not determined by it. • A 1999 MORI poll found that 20% of the fraud. Only two-thirds of public sector population made a distinction between managers disagreed that “petty fiddling is There is a school of thought that we get personal and corporate property. They saw OK if I meet my targets”. The figure for the society we deserve. It sounds harsh, taking office materials or buying a stolen private sector managers was 45%. The yet it is the concepts we prioritise, not CD player as ‘fair game’. survey also found that under-35s are less those we heed from time to time, that in likely to be strict about ethical conduct practice shape our lives. The level of ethical • The Centre for Crime and Justice Studies than older employees. behaviour varies between times and places (CCJS) at King’s College discovered in because they offer different inspirations 2002 that 22% of those aged 25-65 would • BDO Stoy Hayward’s 2006 survey of and incentives. consider padding an insurance claim; 16% employee attitudes found that 16% would be willing to cheat in a second-hand thought it acceptable for a colleague Some of the inspirations and incentives sale; 10% would claim for refunds they to regularly add a few pounds to their offered in Britain today are inadvertently knew they were not entitled to. Many expenses. 13% found it acceptable weakening our ethical defences and thus of those concerned had good incomes, for a manager to award a lucrative our protection against fraud. We need to making want an unlikely motive. contract to a company secretly owned consider the cumulative impact, not least by a close relative. on the young, those under intense financial • In 2003 a survey for the Association of pressure and those who have received little British Insurers (ABI) found that 7% of • A 2006 Fraud Track report, based on all or no ethical grounding. adults admitted having made a fraudulent reported cases worth over £50,000, claim, while 47% had been tempted noted that the value of employee fraud Of course unethical behaviour can have to do so. Most insurance frauds were had increased by 200% since 2003. more immediate effects. The Chairman opportunistic. The ABI said the culprits of the US Federal Reserve has referred tended to be “university-educated These findings do not support claims that to “outright fraud” in the selling of sub- homeowners.” there is no such thing as a ‘law abiding prime mortages. Our economic security majority’. Indeed, many of the respondents has already been shaken by the sub-prime • The Home Office’s 2004 Offending, would no doubt be shocked to learn phenomenon. Could the practical link Crime and Justice Survey reported that they are committing, contemplating or between ethics, fraud and national well- claiming false work expenses (16%) approving fraud. But the attitudes quoted being be clearer? and committing insurance fraud (10%) above cannot be dismissed as those of a were “relatively common” amongst 18-25 small minority, even if we make the highly year olds. unlikely assumption that no one concealed their true behaviour or opinions.
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Marginalising Ethical Criteria Getting Away With It
“You’d have to be a saint to give time and The Committee on Standards in Public Fraud has become an easy crime to get money to charity if there was nothing in Life (CSPL) said in 1995 that it frequently away with. Government is incentivising it for you” proclaimed a recent newspaper “heard the expression ‘grey area’ as fraudsters by allowing standards of headline. It encapsulated a widespread a rationalisation of morally dubious justice that we used to take for granted reluctance, even embarrassment, about behaviour”. Many media responses to to break down. using moral criteria for financial decisions. recent television scandals took a similar tack, despite their involving deception The Panel once more draws attention to the The result is an impoverished moral and financial loss to the public. OFCOM Fraud Review Interim Report which found vocabulary, encouraging us - and reported that “some broadcasters appeared “a lack of willingness by police forces to particularly the young, untutored and to be in denial about their responsibilities accept reports of fraud outright” because of financially pressured - to put purely to ensure programmes delivered on the “a lack of capacity…even when reports are personal convenience before the just transactions they offered to viewers”. taken, little is done with them…Whether claims of others. And sheer convenience a fraud gets investigated can depend on (usually dressed up as ‘need’) is the It should be no surprise that the public have whether the victim can organise and criteria fraudsters of all kinds use to come to hold those running our institutions finance the investigation…The chance of excuse their crimes. in less regard. A 2007 CSPL survey a low or medium value fraud against the found that only 23% of voters trusted private sector being investigated is very Ethical criteria are marginalised in other government ministers to tell the truth. small”. The final report added that “many” ways too. Consider how morally dubious The then Chairman of the Committee, Sir uninvestigated serious frauds include “cases actions by well-known figures are reported. Alistair Graham, said “people do not believe involving organised crime”. For some years these have tended to be they are dealt with in a straightforward, judged more by material factors - impact honest and open manner”. An IBE poll of The Review also found that “the penalty on votes, sales, job prospects - than by the previous year showed business leaders, for fraud is relatively low” compared ethical criteria. We are familiar too with the politicians and journalists to be trusted by to those for other acquisitive crimes. carefully worded ‘non-apologetic apology’ only 31%, 20% and 19% respectively. “Current fraud sentences…are not viewed whereby celebrities expresses ‘sadness’ as a deterrent.” Over a period of five years for ‘hurt’ caused rather than admitting It is interesting to note that other much the average custodial sentence in cases wrong doing. criticised professions received higher brought by the Serious Fraud Office (which approval – judges and the clergy both handles those worth over £1 million) was scored 75% and the police 61%. Taken as only 31.7 months. The average custodial a whole, these findings suggest that public sentence for fraud in a magistrates’ court attitudes are shaped by observing the was three months and just over 15 months behaviour of specific groups rather than in the Crown Court. by the indiscriminate cynicism so often suggested by the media. Crime inevitably grows when the balance of risk tilts in favour of the lawbreaker. The Government is taking huge risks for our future by letting it seem that fraud pays.
LOW RES PROOF ONLY 11 The Business Context
Business ethics exert immense influence on society. Most of us spend a large part of our time at work and the attitudes that prevail there inevitably influence us in other parts of life. We also encounter corporate ethics as customers and gain impressions of them via advertising and the media (both major industries in their own right).
An excessive distinction is often made between personal and business ethics. Different factors and dilemmas apply in different environments and more complex moral criteria must sometimes be applied. But we must be careful about allowing too many exceptions. The marketplace is not a separate moral universe.
The Role of Corporate Culture
The Institute of Business Ethics has warned Double standards do great damage. Trainers Fraud flourishes when staff fear to speak that “ethical failures in companies with report that professional staff often dismiss their minds. ‘Shooting the messenger’ and codes are becoming all too common to minor workplace dishonesty on the grounds a climate where people feel obliged to be treat as aberrations”. In fact many corporate that ‘they can afford it’ and ‘they’ve never relentlessly, if fatuously, ‘positive’ blocks codes are littered with generalisations such been loyal to me’. If executives lie about bad news. A 2006 BDO Stoy Hayward as ‘trust’, ‘fairness’, ‘openness’, ‘acting expenses or sack minor fraudsters whilst survey found that only 53% of workers for the long-term interest of society’, or slapping senior ones on the wrist (a would report fraud to a senior colleague. ‘passionate’ - concepts so vague as to baffle situation often complained of by police all attempt at holding their expounders officers, lawyers and accountants) they Over a third of these feared some sort of to account. ‘Integrity’ is often cited as a are effectively inviting worse problems. recrimination - losing their job, being cold- corporate value but is usually earthed in shouldered or having their career prospects too few specifics to be seen as any more Too many practices are considered harmed. This atmosphere influences senior than an attempt at image building. acceptable as long as they generate profits executives too and makes some afraid to or meet other corporate objectives. report, or even count, fraud losses. Workers pay more attention to what their Unethical behaviour can be encouraged bosses do rather than what they say. This by awarding salary increases, bonuses and Public Concern At Work points out that year’s Deloitte & Touche USA’s Ethics & share options with little or no regard for the “the approach many organisations now take Workplace survey showed employees ranking methods by which targets are attained. to information from workers is similar to the behaviour of management (42%) and the attitude taken toward consumers thirty direct supervisors (36%) as the top two Many businesses disguise fraud losses as years ago (that they were troublesome, factors contributing to the promotion of an ‘overheads’. This deprives shareholders, untrustworthy complainants)”. ethical workplace. It is unlikely that British lenders, suppliers and customers of results would be very different. information; inhibits awareness of fraud risks; reduces pressure on government to address the problem; and makes it easier for fraudsters to move on to fresh crimes.
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Creating an Impression
The CCJS survey already cited found that Making excuses for business leaders does 82% of consumers in England and Wales nothing to improve matters. It has been said saw themselves as victims of crime or that “there can…be a disconnect between shady practices in the marketplace. 14% the good intentions of senior management had experienced nine or more incidents. and the behaviour of their customer-facing Complaints included being sold poor people”. Yet is it really plausible that quality prepacked food (50%); being top executives are unaware of bad sales offered too little by an insurer when practises and other disreputable business making a claim (31%); continual failure by methods? Jeremy Paxman has said of one banks to rectify errors (22%). recent television scandal that “I know people who worked on [the programme Some of these complaints are minor, concerned] who told me the best part of a involve very small firms or are subjective year before the scandal how bothered they in nature. But the cumulative effect of were by what was happening”. such impressions is surely significant and ethical businesses are paying the price Patricia Barker of Dublin City University along with the guilty. Eight people out has said of unethical businesses that of ten disagreed that “directors of large “rationalisation leads to arguments such as companies can be trusted to tell the truth” ‘everyone is doing it’, ‘ If I don’t do it, our according to a MORI poll for the Financial competitors will’, ‘The insurance company Times in June 2003. 65% of those in full- will pay’… In an organisation where people, time employment did not believe that especially managers and leaders, are behaving “companies can be trusted to honour their unethically and rationalising their behaviour, pension commitments to employees”. they will be indignant if challenged with unethical behaviour.”
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A Case Study
Give-Us-A-Loan Plc (GUAL) is a financial services company set up primarily to cater for customers who find it difficult to obtain credit elsewhere. Most of its business consists of unsecured consolidation loans.
The Chief Executive is a strong believer in effective ethical guidance and an open and transparent culture. To that end he has personally written the organisations’ ethical policy which is placed on the corporate intranet for staff to read at their leisure. He insists that all Directors ‘walk the talk’ even if they are not fully convinced of all aspects of the Code.
The Sales and Marketing Director has been with GUAL since it was established and is credited with growing the business virtually single- handed. It was recently discovered that he had over-claimed his home relocation expenses by about £5,000. He apologised and repaid the money. Nothing more was said on the matter.
Like many other financial services GUAL has a whistle-blowing hotline There is little evidence of fraud in the businesses GUAL has a strong performance which is rarely used. The Chief Executive organisation. The fraud policy document, driven culture. Customer-facing staff are is delighted with this as it implies that the personally prepared by the Legal Services encouraged by attractive bonuses to deliver firm has no obvious problems and staff are Director, is also available on the intranet results in all areas, including new and very happy. He believes he has established a and staff are expected to read it on joining. repeat business, collection and bad debt strong ‘no blame’ culture in GUAL. Any identified fraud must be reported to performance. a Board Director. Although fraud is not The Chief Executive is also pleased that clearly defined in GUAL’s policies, not one Annual objectives for staff are performance- through strong negotiation his senior report has been made to a Board Director driven and little mention is made of risk management have agreed excellent terms this year. management and control. with many suppliers, especially in IT where the contrator is now dependent on GUAL GUAL is an entirely fictional Particular types of lending attract premium for its future livelihood. company; the issues are real ones. bonus rates and there has been a marked increase in the sales of such business in the past six months. This has pleased the Board of Directors.
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Lessons for the Rising Generation
Successive seasons of the popular television Many of the ideas and incentives gaining JABE’s Executive Director, Lorraine documentary series The Apprentice ground in Britain today risk doing their Spector, says that “there is a lack of an have provided a fascinating insight into worst damage in the generation to come. ethical framework which hits those under changing social mores. Some contestants 25 hardest. Teenagers are bombarded with treated viewers to displays of egocen- The Jewish Association for Business Ethics mixed messages, leaving little room for tricity unrestrained by anything other than (JABE) runs roadshows and provides clear direction concerning basic values.” tactical considerations, together with a material on ethical issues for 12-18 year hunger to ‘get results’ at almost any cost. olds in a wide range of state and private Such behaviour is untypical of business as a schools. Regardless of background whole (and has been widely denounced) but pupils tend to express views founded on one must ask why a number of talented and expediency and self-interest. The following well-informed young people see it as the comments are typical: “my dad says you can way to get ahead. afford to be ethical once you’ve made your first million”; “you’ve got to be ruthless to get on in business”; “it’s all right to steal from big stores, they won’t notice, and anyway they’re covered by insurance”.
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“Young people hear lots about rain forests Ms Spector’s experience makes her hopeful. and other global issues but the key is to Many teenagers begin by expressing help them understand that their own unethical perspectives because basic ethical decisions will have consequences for morality is seen as unfashionable. Attitudes them and the people around them”. JABE begin to change, however, after pupils have addresses this deficit by exploring everyday discussed the issues in more detail. She ethical scenarios (such as petty theft or points out that “most people want to live lying on an application form), illustrated by and work in an ethical way and in ethical sketches and role play, to help pupils develop environments. In our experience young a stronger sense of personal responsibility. people are looking for a framework”. Six “The goal is to sensitise students to real life hundred schools now teach JABE’s Money & dilemmas and to show them that anyone can Morals programme. choose an ethical path.”
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Strengthening the Ethical Framework
Despite the often impressive debate about More Than Self-Interest. There are clear Some Building Blocks social and business ethics in recent years advantages in being ethical (such as good some vital issues remain little expressed, reputation) but attempts to ‘sell’ decency and perhaps little understood. These are on the grounds of self-interest are likely to less about ethics per se, more about the end in disillusion. Morality often involves framework within which they are applied. doing things contrary to our own material interests. Teaching ethics requires a focus on We All Need Help to be Ethical. Much our duty to others as well as to ourselves. ethical training assumes that saying ‘no’ to dishonest behaviour is easy. Those who Professor Christopher Cowton of find it so have usually enjoyed benefits of Huddersfield University has analysed the upbringing and circumstances of which they argument from self-interest as it applies to may be unaware. Most of us come under listed companies and his general point may pressure to cut corners. Ignoring human be applied to individuals too. “You might weakness and taking ethical behaviour for look for an impact on share prices, but if granted deprives people of the support they the financial benefits of an ethical action need in times of stress. We should admit our are recognised by the market, they will vulnerabilities and recognise that all of us be impounded in share prices at the point need help to stay ethical. of recognition, not over the years that the action is actually carried out. It is not clear that ethics pays – nor that it never pays.”
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Avoid Narrow Interpretations. Honesty is Champion Objectivity. It is easy to lose our Cultivate Courage. Courage has been a necessary but not a sufficient condition moral compass by seeing issues entirely described as a ‘behaviour’ rather than an for ethical behaviour. Executives who tell through our own eyes, or by uncritically ethical quality. Yet it underpins all ethics the truth yet treat their staff badly, or who accepting the values of an organisation. and is particularly relevant to fighting fraud. are too soft on minor thefts, are creating We all need a moral yardstick outwith the We discover a fraud but fear for our job if a climate where fraud becomes a more standards of our immediate environment. we report it. We ought to sack a fraudster attractive proposition. Treating others as but are afraid of the repercussions. Our we would like to be treated ourselves is the Objectivity – respect for the factual and colleagues are pressuring us to lie or essence of morality. moral basis of a situation - is a defence obscure the facts about corporate revenues. against undue self-interest as well as Our audit uncovers false accounting but Opposing Double Standards. It is too often external pressure. It needs to be firmly we don’t want to loose a client. These are presumed that there should be one set of emphasised and carefully taught in business frightening situations for people to find rules for ordinary people and another for and professional training. In its recently themselves in. their leaders. Such attitudes breed cynicism revised Code the Institute of Chartered and resentment. Though there will be some Accountants in England and Wales Ethical training can help us know the valid exceptions leaders must almost always (ICAEW) stresses the necessity for “self- right thing to do but it is often up to a live by the rules they impose on others. review” of professional judgements. It is lonely individual to actually do it. Courage Amongst other things this means taking a right to do so: objectivity requires a healthy cannot be taught but it must be talked firm line on fraud by senior executives. scepticism about our own righteousness. about, praised, illustrated by relevant examples and held up as the indispensable ally of morality. “Where courage is not no other virtue survives, save by accident.”
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Ethical organisations are a reality. Thousands of them reconcile morality, targets and profitability every day. The key is personal commitment but large structures also need rules and systems. The ICAEW has referred to the “drivers of organisational integrity” needed to build an ethical culture. It emphases that these need to be “interconnected with each other [and] mutually reinforcing.” Several bodies (notably the IBE and JABE) have published detailed guidance so the Panel here focuses on some issues of general importance.
Defining Honest Behaviour. It should 1960s. The Civil Aviation Authority explains not be assumed that every employee has that “as in all safety reporting systems identical notions of right and wrong. Senior involving people’s shortfalls or errors, executives should set and communicate it is difficult to overcome the natural clear minimum standards. Drawing lines human tendency to cover up mistakes. It on matters such as expenses and internal is therefore essential to do away with the reporting will be respected by the honest stigma attached to owning up”. majority, warn off others and make it easier to identify problems at an early stage. Promoting Fairness. The Financial Services Authority (FSA) has broken new ground Reviewing Rewards. Pay and bonus policies by encouraging regulated firms to adopt a can incentivise staff to disregard or take systematic approach to “treating customers account of ethical considerations. Patricia fairly”. This involves reviews of product Barker has written that “people do what is design and governance; marketing and rewarded...If ethical behaviours are not product promotion; remuneration; sales and rewarded, they simply will not be adopted.” advice processes; after sales information; Leaders must identify the impacts of and complaints handling. Regulated firms different remuneration methods and use the are expected to “ensure that they have the information to recalibrate the targets they right management information and other set. Rewarding staff for building customer data to enable them to satisfy themselves loyalty (and the further sales which flow that they are treating their customers fairly”. from an emphasis on customer service) is one way in which pay and bonuses can be The Authority makes clear that “this is used to encourage ethical behaviour. not about customer satisfaction…firms cannot be blamed for movements in the No Blame Policies. Ethical behaviour market…but they are responsible for thrives when people are unafraid to voice the expectations which they create”. their concerns. No news may not be good Nor does the FSA impose a definition news. A ‘no blame’ culture allows staff to of fairness, rather it hopes to encourage admit mistakes without fear of retribution. senior executives to explore the issues This non-punitive system of reporting was for themselves. The Panel commends the pioneered by the airline industry in the late programme to trade and professional associations and hopes they will consider any lessons for their own fields.
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Codes of Ethics should emphasise the need Training. Ethical issues arise in almost Protecting Whistleblowers. The legal for personal responsibility. They require every aspect of organisational life and protection provided by the Public Interest clarity, brevity and unambiguous principles. should therefore be common to most Disclosure Act 1998 has not prevented Codes published by professional bodies tend training modules, however ‘technical’ many whistleblowers suffering for their to be more specific than those promulgated they may appear. This will combat the actions. Government, trade and professional by businesses. They stress that members widespread assumption that ethics are a bodies have a role to play in monitoring must not be guided solely by self-interest. kind of ‘specialist subject’ rather than an how these courageous people are treated, The Institution of Civil Engineers says essential part of every employee’s toolbox. and in providing financial assistance to those that its members have a “duty to behave disadvantaged by speaking out. honourably; in modern words, ‘to do the Time must also be set aside for staff to right thing’. At its most basic, it means that discuss how lessons may be applied in A Sense of Honour. Some of the most members should be truthful and honest”. their own roles. Principles will be better effective organisations are motivated understood if illustrated with relevant real by more than a desire to hit targets. Detailed guidance spells out the life cases. Regular and prominent internal Executives and employers want to feel implications of particular precepts. For publicity promoting the provisions of a proud of what they do because they judge instance, the General Council of the Bar code are vital. themselves by more than material criteria. says that a barrister “must not undertake How they get results is as important as the any task which…he knows or ought to Reporting Fraud. Regulated financial results they get. know he is not competent to handle services companies are now legally obliged [or] he does not have adequate time and to report financial crime and larger This is partly about reputation, partly about opportunity to prepare for or perform”. businesses need to make clear that they self-esteem but always about a recognition will not sweep it under the carpet. It is that moral behaviour is a vital part of life. One of the greatest benefits of devising possible to exaggerate the risks involved in The old-fashioned term for this motivation a code is that it can raise awareness and reporting fraud. Aid to the Church in Need is ‘honour’. Most people want to work for stimulate fresh thinking about how both UK suffered a high-tech website attack in organisations they can take pride in and individuals and organisation should work. November 2005 which led to hundreds of wise leaders will go with the grain of The final product will be more effective if its benefactors being defrauded. “The press that desire. staff are genuinely involved in the process. were surprised by how we went public and that we admitted what had happened — but as a Christian charity we decided we had to be honest and we hope that others will learn from this case about the ‘conspiracy of silence’ over internet fraud. 98% of people have been very understanding.”
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Common Sense v Red Tape
Policies, training and systems have The FSA adopted a principles based Britain is a country with a deep-rooted important roles to play in promoting approach to its Treating Customers Fairly ethical heritage. Discussion, education and ethical behaviour but an over-zealous and programme because “extensive detailed rules publicity are the best tools for promoting bureaucratic approach will prove deeply were not working well..in too many parts of moral principles. There is work to be done counterproductive. the retail markets, all serious thought…was in highlighting where we fall below decent delegated to the compliance department, standards, in praising those who live up Professor Alan Doig notes that “a who in turn thought about it only in terms to them, and in asserting the centrality comprehensive control environment often of…the letter of underlying rules”. of ethics in every field. abrogates individual responsibility…with potential offenders claiming that...breaches The Panel pleads for a sense of proportion. of the rules, or perceptions of misconduct It is firmly opposed to new laws and must be determined externally…all regulation in this area, to the growth of an conduct is acceptable unless specifically ‘ethics industry’, and to interference in the forbidden”. private lives of employees. It also rejects the idea that there is a single template for every organisation. It believes strongly in proper consideration for the special requirements of small businesses. Some may benefit from a Code of Ethics or an Ethics Committee but others may find them superfluous.
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