An ethical issue is defined as a problem, situation or opportunity that requires an individual group or organisation to choose among several actions that must be evaluated as right or wrong, ethical or unethical. Businesses and industries increasingly find themselves facing external pressure to improve their ethical track record. This external pressure is exerted by stake holders. Stakeholders can be defined as all those who have a stake or claim in a business. These include employees, customers, shareholders, suppliers, government, communities and society as a whole. All these people ultimately determine whether specific business actions and decisions are seen as ethical or unethical. They also, more often than not, raise ethical issues when they exert pressure on business top decision makers that serve their particular agendas. Stakeholders apply their values and standards to many diverse issues such as working conditions, consumer rights, environmental conservation, product safety and proper information disclosure.
Ethical issues that affect most businesses can be classified as honesty and fairness, conflict of interest, fraud, discrimination and information technology.
- Honesty and Fairness refers to truthfulness, integrity and trustworthiness, while fairness is the quality of being just equitable and impartial;
- Conflict of Interest exists when an individual must choose whether to advance his or her interests, those of the organisation or those of some other group;
- Fraud refers to when an individual engages in deceptive practices to advance his or her own interests over those of his or her organization or some other group, it is any purposeful communication that deceives, manipulates or conceals facts in order to create a false impression;
- Discrimination is defined as is the prejudicial distinguishing treatment of an individual based on his or her membership - or perceived membership - in a certain group or category. It could be sexual, racial or any other form; and
- Information Technology refers to ethical issues and the numerous advances made in internet and other forms of electronic communication. Here we consider issues such as privacy of employee and their legal protection of their rights
ETHICAL ISSUES FACING THE BANKING INDUSTRY
Financial institutions including banks of all sorts, credit agencies, private equity firms, pension funds, insurance companies, and the like- have long been considered by most people to maximize financial assets. Financial institutions have become very complex and sophisticated in the way they operate. The products and services they offer tend to be more and more complicated. The ways they invest resources, the way they design, promote, and implement credit facilities, all become less evident year after year, and the speed at which they evolve is ever accelerating. In pursuing this end, banks, and financial institutions in general, have long defended the confidentiality of the information pertinent to their business, be it data about their clients, the sources and the destinations of the economic resources they handle, their credit-giving policies and procedures, and many more aspects of the banking profession that tend to be little transparent and not very communicative about their way of doing business. Unfortunately, governments, regulators, and other institutions simply cannot cope with this rate of evolution in a satisfactory manner. Banks are moving too quickly for the reaction-time of governments and other organizations. As a consequence, many important issues are being overlooked by the institutions charged with directing our societies toward the common good.
One could erroneously conclude that money is just another commodity being traded. There is a danger that money will be treated as just another product that makes things possible, as a simple means to accomplish an end. However, to handle money as a commodity with no ethical implications and impact bears the risk of becoming a highly inhumane approach when we look it in detail. Money, in all of its forms, has implications and consequences. Money is not just another commodity being handled. Money implies actions, money allows things to happen, money promotes and enacts changes. Money is a very important, if not the most important fuel for the happenings in the world. Given that banks are the official intermediaries of money, we need to look at how they handle money and what they do with it.
Financial institutions play a key role in the supply and movement of money. How banks use money is not irrelevant from a moral and ethical perspective. Given the fact that money can be used in crime, pollution, corruption, violation of human rights, threats to human life, totalitarian regimes, and all sorts of wrong-doing and considering that money is eventually funded to a very large extent by individual investors, we have several concerns regarding financial institutions and how they use money. Banks can channel economic resources in different ways that make money result in some form of evil-doing. The two main ways in which banks can do this are:
- By lending money to others, money enables and promotes actions, and in this sense, when banks lend money to evil-doers they are facilitating their activities. Banks effectively enact, enable, and promote the realization of actions with their lending of financial resources.
- By actively and directly investing money, that is, owning shares, be it in the name of others or for themselves, in companies, projects, or countries, that conduct different forms of wrong-doing.
In this essay we intend to draw your attention to the key role the banking industry plays in that supply chain of money. Moreover, we will call your attention to the fact that it is your money, which can play a key role in that supply chain and that is not morally or ethically avoidable anymore to investigate and to actively question how banks are using that supply chain to channel your money, with financial practices that can be fueling wrong doing across the world.
Usurious practices
Banking is a business concerned with protecting and growing people's money. As in any industry, it is understandable and acceptable that banks try their best to maximize their investments and therefore, it is logical that banks charge interest rates on the loans and financing activities they offer to their clients. However, banks that charge excessive interest rates, abusive commissions, or ultra-profitable credit charges that go beyond reasonable standards for taking an extra benefit from a specific situation in detriment to their customers, are guilty of usury. Usury may be defined as demanding significantly more money back from customers than is just and fair. Financial institutions consistently engaged in usury are accordingly a subject of our concern. While we do not necessarily endorse bureaucratic regulations which may be excessively burdensome and counter-productive, we do expect banks to act morally with respect to lending practices within their organizations which are potentially usurious. We are concerned that banks are frequently charging excessive rates and imposing unfair advantages for themselves upon customers. We thus expect banks to take care to implement policies that prevent wrong-doing in the form of usury and similar sorts of abusive practices.
Financial institutions are also guilty of some forms of usury when they encourage their customers, especially individuals, to go into excessive debt by taking irresponsible credit at too high interest rates. Some credit customers, especially those located in low-credit penetration communities are frequently being subjected to excessive marketing and pressure to drive them into credit at advantageous interest rates that go beyond what is customary in the industry.
Speculative banking
The assets a bank lends and invest should be handled responsibly, even moreover so, when we consider that the bank is investing and lending money that belongs to other people. Engaging in excessively speculative investments and irresponsible credit lending practices is morally unacceptable, and in many cases, not even good business. We believe bankers and financial professionals should take a responsible approach in all investment and lending operations with its customers' money. Even in the case of high-risk, high-return type of clients, a bank is the ultimate entity making the investment decisions for the investors, and practices of speculatively investing heavily in too-risky securities such as derivatives without the adequate collateral, sub-prime mortgages, irresponsible adjustable-rate-mortgages, and other investments that do not undergo the serious due-diligence required just for the sake of short-term returns should be considered cautiously, especially given the massive loss of wealth that we have witnessed during the current financial crisis.
The situation of over-speculative, over-risky banking gets especially complicated from a moral perspective when we consider that clients seldom receive the necessary, detailed information to let them know what kind of investments their bankers are undertaking with their money. Another aspect of concern regarding speculative banking, which has also been evidenced in this crisis, is the fact that many financial institutions have been involved in speculative investments resulting in enormous losses for their customers while their executives continue to receive compensation packages and bonuses in the millions of dollars. While we understand that the banking profession has traditionally generated a lot of wealth for its executives, their excessive bonuses become an ethical concern when their clients' wealth has been destroyed precisely because of these forms of speculative investment practices.
Financing arms manufacturing and trade
Many banks are actively financing the military industry around the world. While we recognize the moral acceptability of a country taking care to defend its population, and thus investing in arms and weapons, we are concerned with excesses and human rights violations involved in this activity. We are specifically referring to indiscriminately destructive, overly-damaging weapons and their manufacturers and distributors. These usually fall in the category of so-called "cluster munitions" which are highly-destructive weapons which not only destroy an enemy's military target, but quite frequently kill thousands of innocent civilian victims. Some weapon-manufacturing companies have obtained credit facilities of very considerable sizes from well-kwon financial institutions. We are talking about credits in the billions of dollars. We cannot pretend that Banks did not know the purpose of the financing facilities they were arranging. Even worse is the fact that banks now also own shares in these cluster-munitions manufacturers. Several reputed financial institutions own shares in companies like GenCorp, Lockheed Martin, Textron, and Raytheon, which add up to double-digit equity positions in those companies. Owning shares in a company known to manufacture such weapons has ethical and moral implications.
Financing and supporting totalitarian regimes
Banks frequently give loans to companies operating in countries governed by totalitarian regimes such as Burma, North Korea, or Sudan. Those companies in turn use the money to enter those markets. Some of these countries are plagued with corrupt government authorities that frequently require them to give substantial bribes to allow them to operate in those nations. By financing these companies, banks are allowing money to flow into these totalitarian regimes which have no respect for human rights and who use this money to strengthen their positions in their respective countries. The fundamental problem is not that a company be present in a country with a repressive regime, but that its business there is somehow complicit in propping up or perpetuating the repressive regime.
Financing of companies with little or no commitment to social responsibility
The banking industry usually grants credit facilities to companies, and helps in raising capital in the financial markets, to companies operating with no socially-responsible agendas, or with little commitment to one. We have observed companies that have little respect for their workers and which have consistently violated labour laws (mainly in developing countries) having no problem securing credits from well-known banks. So far, banks have not been interested in questioning clients about their human-rights or social-impact agendas. Banks tend to look at the risk-return ratio of their investment as the sole basis for granting the credit.
Some banks are financing companies, for instance in the infrastructure industry, that operate in a highly utilitarian way in some countries. Some infrastructure developers, for example, that build water dams around the world have been accused of impacting the communities in which they operate by forcing the displacement of people from their home communities to build the dams wherever it is more economically convenient for them to build them, regardless of the social impact this might have. Making money available to companies operating in this manner fuels their wrong-doing. Funds channelled to these types of companies can easily end up in the hands of those totalitarian regimes.
Ecological Impact
We should expect banks to start looking more in detail at the potential ecological damage that their clients could be generating when receiving financing from them. Companies known to be involved in activities that result in substantial environmental damage through the extraction of fossil fuels for instance; companies polluting the seas through the release of toxic chemicals; companies that manufacture products which persist in the environment and are linked to health concerns; and any other company damaging the world should not receive financing so easily as they do today from banks and financial institutions. While we recognize that avoidance of all possible environmental damage is often very expensive and hard to achieve, we believe that the efforts should be at least seriously pursued. We expect companies to actively search for a balance between their activities, their production processes, their use of natural and human resources and the respect for the environment.
Financing, donations, and sponsorships contrary to the good of the family
As financial institutions handle huge amounts of capital, the impact of their donations and sponsorships can be substantial and the money they channel through donations can have important impact on society. In this respect, we are particularly concerned with banks giving active support to organizations that advocate against the institution of family and against family-values. As we are convinced that the family is the basis for any healthy society, we are interested in seeing banks staying away from initiatives that somehow can affect the integrity of family or attack family values in any way. These activities could include granting financial support to causes that actively promote activism against family values. While we acknowledge that there are other points of view regarding the value of families and their role in society, we prefer to keep our investments, and recommendations for our clients' investments away from companies promoting non-family friendly causes and activism. We prefer not to generate our wealth from investing in companies that opt for financing, promoting, and supporting entities and organizations that do not share our view on family and family values as the cornerstones of society, peace and harmony.
Involvement in social enterprise
The banking industry plays a key role in the development of the markets in which it operates. By lending and raising money, a bank can effectively help develop a community, but further than that, a bank is expected to get actively involved in supporting the development of that community in which it operates. More and more banks and financial institutions are praised when they support organizations such as cooperatives or credit unions, or get involved in financing of community initiatives. Given the fact that a bank benefits directly from the economic resources of a community, we would be concerned when a bank openly neglects to help those communities in which it conducts business.
CASE STUDY: THE BCCI SCANDAL AND BANK SCANDALS IN KENYA
BCCI stands for Bank of Credit and Commerce and refers to a banking giant began in the UK by Sheikh Zayed, the leader of Abu Dhabi in 1972 and was seemingly successful before it collapsed in 1991. BCCI scandal is rated as one of the biggest bank scandals in history that brought an estimated £15 billion loss on its wake in customer deposits. According to BBC news on-line on 13th January 2004, BCCI scandal went bust owing more than £10 billion to its creditors.
According to fas.org, BCCI was involved in quiet a number of dealings with both unethical and criminal nature finely intertwined. Top on BCCI's scandal were money laundering schemes. It is said to have been the bank of choice for fugitives, money launderers and terrorists. There are more questions than answers regarding how a scandal of this magnitude could have happened in a developed economy at the full glare of the Bank of England (BoE). How is it that dirty money from drug peddling business in Panama and Colombia used to fund terrorism cartels like Mujahedeen and Abu Nidal in the Middle East found its way into BCCI coffers? The following is a list of Issues BCCI was involved in that came to the surface after its closure and subsequent investigations into misdeeds of its officials:
Global Financial Crimes
Right from its onset, BCCI was no ordinary bank. It used shell corporations and bank confidentiality and secrecy havens; layering of its corporate structure; its use of front-men and nominees, guarantees and buy-back arrangements; back-to-back financial documentation among BCCI controlled entities, kick-backs and bribes, the intimidation of witnesses, and the retention of well-placed insiders to discourage governmental action. Among BCCI's principal mechanisms for committing crimes included fraud by BCCI and BCCI customers involving billions of dollars; money laundering in Europe, Africa, Asia, and the Americas; BCCI's bribery of officials in most of those locations; support of terrorism, arms trafficking, and the sale of nuclear technologies; management of prostitution; the commission and facilitation of income tax evasion, smuggling, and illegal immigration; illicit purchases of banks and real estate; and a panoply of financial crimes limited only by the imagination of its officers and customers.
BCCI and Bribery
BCCI had operations in 73 countries in the world most of whom were third world countries from Latin America, Africa, and Parts of the Asian continent and Islands and to penetrate these countries and evade been caught with inappropriate dealings, BCCI relied on relationships with people in high places in those governments. It is has been revealed by the investigators and the appointed liquidators (Deloitte and Touché) that most of these countries' central banks made deposits with BCCI. It bribed them heavily to keep them tight-lipped on BCCI'S improper, even illegal dealings.
BCCI's Accountants Fraudulent Activities
BCCI systematically bribed auditors to cover its dirty tracks for more than a decade. The writing could be seen on the wall the day BCCI divided its operations between two auditors none of whom had a right or capacity to audit a corporation of this magnitude. No one objected to this move for the entire time BCCI sailed in the murky waters of grand corruption and funding of terrorism, drug peddling and prostitution. It went ahead to provide loans and financial benefits to some of its auditors and partners of Price Waterhouse in the Caribbean and Grand Caymans. This affected the independent judgment of the auditors involved. Some BCCI officials possibly provided sexual favors to certain persons affiliated with the firm for the same reasons outlined above
BCCI's Smear Campaign
Hill and Knowlton accepted an account with BCCI in October, 1988 despite the fact that their partners had negative information about BCCI. Their payback to BCCI was to help it carry out an aggressive campaign to demonstrate that BCCI was 'clean' in its dealings. It was partly to help BCCI cover up the Tampa drug and money laundering indictments. This role was performed by way of disseminating materials discrediting the persons who had earlier raised their voices against BCCI's corrupt dealings.
BCCI's Infiltration of the U.S. Banking System despite Regulatory Barriers
In 1977, BCCI developed a plan to infiltrate the U.S. market through secretly purchasing U.S. banks while opening branch offices of BCCI throughout the U.S., and eventually merging the institutions. BCCI had significant difficulties implementing this strategy due to regulatory barriers in the United States designed to ensure accountability. Despite these barriers, which delayed BCCI's entry, BCCI was ultimately successful in acquiring four banks, operating in seven states and the District of Colombia, with no jurisdiction successfully preventing BCCI from infiltrating it.
BCCI also purchased banks through techniques such as nominees, and arranging to have its activities shielded by prestigious lawyers, accountants, and public relations firms on the one hand, and politically well-connected agents on the other. As it was, regulatory suspicion towards BCCI required the bank to deceive regulators in collusion with nominees including the heads of state of several foreign emirates, key political and intelligence figures from the Middle East, and entities controlled by the most important bank and banker in the Middle East.
These and many other improprieties led to the closure of BCCI. The liquidators of BCCI have so far managed to recover 75% of the money lost after its closure. But the battle for justice to the innocent depositors and customers of BCCI has been fierce, enduring and painful. Two decades after BCCI was wound up dramatically, investigations about its queer dealings are not yet complete. There have been allegations of withholding, even hiding of witnesses by both England and Abu Dhabi. Closer home, we are going to revisit the unethical issues leading up to the closure of Charterhouse bank.
CASE STUDY: CHARTERHOUSE BANK SCANDAL
Africa Centre for Open governance (AfriCog) in conjunction with then KACC (Kenya Anti-Corruption Commission), did some investigations with the help of KRA and CBK and later came up with a document entitled "The Smoldering Evidence-The Charterhouse Bank Scandal." This document which has been forwarded by the then AfriCog Executive Director Gladwell Otieno outlines the series of events since 2004 when whistle blowers, most of whom were former employees of charterhouse bank raised the alarm over certain irregularities perceived to have been carried out in this bank. Like a former case we have looked at above about the BCCI scandal, most of these irregularities carry both criminal and unethical nature. We hold the view that almost all things we would categorize as criminal are of necessity unethical; and this has informed our choice of this weighty document whose authorship is legally centred.
Charterhouse Bank Money Laundering Scandals
Money laundering involves making money whose source is illegal seem as if it came from legitimate sources. Joint investigations by PwC and the government's Investigation Taskforce uncovered the following suspicious transactions:
Large, frequent and overly unusual deposits, withdrawals, payments of cash, certain exchanges involving foreign currency and negotiable instruments which were not consistent with the business of the customer or their financial standing.
Use of multiple or nominee accounts with a view to hide tracks of various questionable transactions which were not consistent with the customers' normal business and financial standing at the time.
Use of multiple or nominee accounts
Consolidation of multiple smaller accounts at several institutions within the same locality prior to onward transmission of funds elsewhere.
Large companies' accounts flooding with payments made through cash at certain periods of time unlike the usual payment mode used.
Charterhouse Bank's Tax Evasions
According to one whistle blower, a former internal auditor in the company, accounts to the tune of 85 out of 200 were not disclosed to the tax authorities properly. Further on, it was revealed that Charterhouse bank had assisted Nakumatt Holdings to evade USD 250 million (approx. ksh.s 18 billion) worth of taxes over a six year period. Over this period, Nakumatt holdings declared no profit. Uchumi supermarket chain which is relatively smaller than Nakumatt holdings remitted over 10 times more VAT than Nakumatt over the same period!
These unethical and criminal dealings by charterhouse bank led to its closure, but not without some casualties. The then central bank of Kenya Governor Dr. Andrew Mullei was thrown out of office after he suggested to the parliamentary committee that Charterhouse bank ought to be closed up owing to its criminal dealings.
CONCLUSION
Is a better banking industry possible? The answer is absolutely YES. Better, ethically-responsible, respectful banking and financing industries are not only possible, but also highly desirable, and they are already starting to emerge. Some banks, mainly small institutions in developed countries have realized the importance of being ethical beyond their internal Code of Values that is, beyond paper and beyond what is strictly within its operations. Individual investors will play a key role in putting pressure on banks and regulators to let them know that banking practices cannot go on as independent of ethics any longer. The relevance of what banks do with the people's resources is material. A number of organizations around the world are starting to pay attention to how money is being used and to the moral implications it has. Some important institutional investors are becoming much more concerned with the handling of their investments. Institutions like the Government Pension Fund of Norway, the so called, "Folketryfondet", the world's largest single holder of equity securities, has been implementing strict ethical criteria to handle their investments.
