Drug Cartels and Terrorists are Using Foreign Ties to Gain Access to U.S. Banking

United States authorities are investigating multiple banks for sanction violations and money laundering. HSBC is being made an example to send the message that the Unites States is not going to turn a blind eye to these activities. Standard Charter Bank reached a $340 million settlement with U.S. regulators for violating sanctions by doing $250 billion in transactions with Iran. Germany’s Commerzbank and Royal Bank of Scotland are facing charges of sanction violations. Wells Fargo & Co.’s Wachovia Bank paid a $160 million settlement in 2010. (Staff2)

After its investigation, Mexico fined HSBC a record $27.5 million (over one-half of the Mexico branch’s 2011 profits. (Staff3) “Mexico loses an estimated $50 billion per year – almost 5 percent of its gross domestic product – in illicit money outflows of different types, including money laundering, corruption, and tax evasion, according to Global Financial Integrity, a nonprofit research and advocacy group in Washington, DC.” (Flannery)

Six HSBC executives testified at the hearing, including David Bagley, who announced his resignation as head of group compliance during his testimony. (Hamilton and Voreacos) The U.S. Senate Subcommittee ruled that HSBC was guilty of conducting 25000 transactions totaling $19 billion with Iran between years 2001 and 2007. (Staff2) The Mexico subsidiary helped drug cartels buy planes through laundered money in Cayman Island accounts. HSBC Mexico set up a Cayman Island branch that handled 50 thousand accounts worth $2.1 billion. (Rushe) Although there was a Cayman Island branch on the books, no offices or staff existed. The Senate Subcommittee issued a 335-page report that detailed how the financial institution repeatedly failed to comply with money-laundering regulations and government sanctions, and allowed terrorists and drug lords to filter billions of dollars through the North America branch of the London based company. Additionally, the bank violated U.S. sanctions when it conducted business with Libya, Sudan, Syria, North Korea, Cuba, and Burma. (Hamilton and Voreacos)

HSBC opened more than 2500 bearer share corporations, the majority opened in Miami, Florida, with assets of $2.6 billion that generated $26 million in annual revenues. Bearer share corporations can secretly change ownership, which makes them a great way of laundering funds. (Staff)

HSBC was fined $100,000 in April 2000 for making a transfer that benefitted the Taliban, yet in the years between 2006 and 2010, HSBC shipped $1 billion to Al Rajhi in Saudi Arabia, despite its links to terrorist financing. The investigation showed that HSBC was aware that it was violating U.S. sanctions by doing business with Iran. An outside audit by Deloitte LLP, confirmed that HSBC completed 25,000 transactions involving Iran that totaled over $19 billion. Approximately 1800 of these were u-turn transactions. Until 2008, U.S. regulations permitted banks to conduct u-turn transactions that go through sanctioned countries but do not originate or end in one of those countries. Regulators discovered that banks were falsifying documents to hide where the transactions are beginning and ending in order to bypass regulations. (Hamilton and Voreacos)

HSBC is also under investigation by the U.S. Justice Department, the Manhattan, New York District Attorney, the U. S. Federal Reserve, and the U.S. Treasury. Although HSBC has allocated $700 million for fines, it has been estimated that the fine from the U.S. Senate alone may be as high as $1 billion. HSBC admitted failure to report 39 suspicious transactions and reporting 1729 suspicious transactions after they were completed. (Staff3) “Paul Thurston, chief executive of retail banking and wealth management, who was sent in to try and clear up HSBC’s Mexican banking business in 2007, said he was “horrified” by what he found.” Mr. Thurston also stated the Bank has doubled oversight funding and adopted Global compliance structure. (Rushe)

Only after the head of the Subcommittee, Senator Levin, declared he felt there might be significant reason for regulators to consider revoking HSBC’s charter, the bank’s senior executives promised changes and displayed remorse for their actions, or lack of actions. The head of HSBC’s retail banking and wealth management unit stated that HSBC will close the Mexico unit’s U.S. dollar accounts in the Cayman Islands. (Rushe)

Works Cited

Flannery, Nathaniel Parish. "Could HSBC Face the World's First Billion Dollar Money Laundering Settlement?" 30 September 2012. Forbes. 23 October 2012 <http://www.forbes.com/sites/nathanielparishflannery/2012/09/30/could-hsbc-face-the-worlds-first-billion-dollar-money-laundering-settlement>.

Hamilton, Jesse and David Voreacos. "HSBC Executive Resigns at Senate Money-Laundering Hearing." 23 July 2012. www.businessweek.com. 15 October 2012 <http://www.businessweek.com/printer/articles/287462?type=bloomberg>.

Rush, Dominic. "HSBC 'sorry' for aiding Mexican drugs lords, rogue states and terrorists." 17 July 2012. The Guardian. 23 October 2012 <http://www.guardian.co.uk/business/2012/jul/17/hsbc-executive-resigns-senate>.

Staff. "Senate report: HSBC 'allowed drug money laundering'." 17 July 2012. BBC News Business. 23 October 2012 <http://www.bbc.co.uk/news/business-18866018?print=true>.

Staff3. "Mexico fines HSBC $27.5m for lax money-laundering control." 25 July 2012. BBC News Latin America & Caribbean. 25 October 2012 <http://www.bbc.co.uk/news/world-latin-america-18993476?print=true>.

"Unicredit 'in US Iran sanctions breach investigation'." 26 July 2012. BBC News Business. 23 October 2012 <http://www.bbc.co.uk/news/business-19384702?print=true>.

The Effects of Leader-Member Exchange on Whistle Blowing

Bhal, K., & Dadhich, A. (2011). Impact of Ethical Leadership and Leader-Member Exchange on Whistle Blowing: The Moderating Impact of the Moral Intensity of the Issue. Journal of Business Ethics, 103(3), 485-496. doi:10.1007/s10551-011-0876-z

 

Corporate governance has become even more complex after the mandatory requirements of the Sarbanes –Oxley Act -2002 were implemented.   Along with extra accounting and reporting requirements, corporations were also required to establish a system for fraud reporting (whistleblowing) (Bhal and Dadhich, 2011). Bhal and Dadhich present a hypothesis testing study that explores the factors that support whistleblowing and how they impact the corporate systems established. The article presents three experimental studies conducted on post graduate engineers in India, which tests ethical leadership and quality of leader-member exchange (LMX) and the morale intensity as in relates to the magnitude of the consequences (MOC) of fraudulent behavior.  Interpersonal interactions or coworkers and the support and encouragement of immediate ethical leaders have a significant impact on the decision to report fraudulent behavior. 

The authors present the following hypotheses:

·         “H1 Ethical leader behavior will be positively related to whistleblowing by the subordinates” (Bhal and Dadhich, 2011, p. 487).

·         “H2 Leader-member exchange quality will be positively related to whistle blowing by subordinates” (Bhal and Dadhich, 2011, p. 487).

·         “H3 Whistleblowing will be highest for ethical leaders in situations with high magnitude of consequences” (Bhal and Dadhich, 2011, p. 488).

·         “H4 The positive relationship between high quality leader-membership exchange and whistle blowing would be stronger for situations with high magnitude of (negative) consequences” (Bhal and Dadhich, 2011, p. 488).

The first study designed around presenting scenarios and asking participants to indicate the level of ethical leadership, high or low and the LMX as low or high. The dependent variable, whistle blowing, was used in a measure of willingness to report without fear and comfort level of delivering bad news of ethical wrong doing. The results of the first study showed that both ethical leadership and the leader-member exchange were successful in predicting whistleblowing (Bhal and Dadhich, 2011).

The second study involved the testing of hypothesis three using vignette scenarios again and crossed the ethical and unethical leadership with low and high magnitude of consequences. The results showed that the effects of ethical leadership and MOC are significant. Moreover, that the interaction between leadership and MOC significantly predicts whistleblowing.

The third study involved the testing of hypothesis 4 (H4), estimating the marginal means for whistleblowing where ethical leadership and MOC were independent variables and whistle blowing as the dependent variable. The results of testing illustrated that the interaction between LMX and whistleblowing is most significant when the magnitude of consequences is also high (Bhal and Dadhich, 2011).

The authors explain limitations in the testing with consideration that engineers were used in the study as participants. In fact, all of the participants were from India, which brings up the concern that India’s culture is characterized by collectivism where relationships are more personal than professional, making reporting more difficult. Additionally, regulations in India concerning fraudulent behavior are considerably weak. Another weakness in the study, not noted as such, is that the average age of the study participants is 26. The post-graduate student engineers most likely had little work experience. A selection of a wider cross-section of participants would add credibility to the well-thought out study.

Practical implications for managers regarding these findings are that the more likely the organization encourages ethical behavior and high consequences along with encouragement for reporting without retaliation, the more likely the corporation will prevent unethical behavior from occurring in the first place.

Innovation and Incentives

Is Innovation spurred by Incentives?

Barros, Henrique M. & Lazzarini, Sergio G. Do Organizational Incentives Spur Innovation?, Brazilian Administration Review (BAR). Sept., 2012, Vol. 9 Issue 3, p308-328

 

This article sets out to show a positive correlation between performance-based incentives and firm innovation (Barros & Lazzarini, 2012). It goes beyond previous studies and theories that state a positive correlation between performance-based pay and innovation by introducing performance-based promotion into the focus (Barros & Lazzarini, 2012). The importance of this is that firms can use this as a tool to increase innovation and, as a result, improve their competitive stance (Barros & Lazzarini, 2012).

This article sets forth two hypotheses (Barros & Lazzarini, 2012). One is that performance-based pay will positively influence firm innovation (Barros & Lazzarini, 2012). The second is that performance-based promotions will positively influence firm innovation (Barros & Lazzarini, 2012). Surveys are then performed on 370 Brazillian firms to evaluate the hypotheses (Barros & Lazzarini, 2012).

The study determines that there is a moderate positive correlation between performance-based pay and innovation, but there is a positive correlation between performance-based promotion and firm innovation (Barros & Lazzarini, 2012). The study also showed that insignificant difference between whether there was a medium level or high level of status incentives used (Barros & Lazzarini, 2012).

This study indicates that the use of, at least, moderate promotions as incentives to employees to seek new innovation is effective in improving firm innovation (Barros & Lazzarini, 2012). The study also showed, through controls, that firms with a board of directors are inclined to be more innovative (Barros & Lazzarini, 2012). Also, larger firms are less likely to be innovative (Barros & Lazzarini, 2012).