Performance negated pay

Much has been written in recent weeks about the pandemic’s impact on AML endeavours – how to conduct CDD checks on clients who cannot leave their homes, and whether to accelerate acceptance of online CDD documents (is the risk of accepting them now smaller than the risk of rejecting them?).  But poor beleaguered MLROs are simultaneously wrestling with another oversight issue which has been exacerbated – but not created – by the dreaded virus.  My thoughts on this have been prompted by a recent Bartleby column in The Economist newspaper (“Tale of the century”, 13 June 2020), which looks at what he has learned over the course of writing a hundred columns – and “the most remarkable discovery was how much is written about management”.

Bartleby makes the observation that the typical corporate structure is “a system created in the 20th century for mass-manufacturing companies”, with middle managers existing to communicate “guidance from top executives to the workforce” – but this function now belongs to the corporate intranet.  Similarly, old ways of measuring performance have become outdated: the “widgets produced per hour” model (simple and tempting though it is) is simply not fit for the service sector.  To put the tin lid on it, “a focus solely on shareholder value, associated with the 1990s boom, is no longer appropriate” – firms must now take notice of wider social issues such as environmental concerns and social responsibility.  Yet many employees in the financial sector are still paid at least a proportion of their salary depending on financial performance.

For the MLRO, this is a problem.  The MLRO does not want staff merely to bring in more business: he wants them to bring in the right kind of business.  And sometimes, of course, the most profitable business is profitable precisely because it is the wrong kind of business: it is too risky for any right-minded firm to take on, and so it dangles enormous fees and promises of future largesse to tempt the unwary.  (Some years ago I briefly considered doing a PhD looking into the impact of bonus-based remuneration on the acceptance of dodgy clients, but was put off when I realised how much statistical analysis was involved – statistics and I are not easy bedfellows.)  But still, the problem remains.  A regulator told me recently that during one supervisory visit he had seen an organisation reducing staff bonuses if client take-on forms and accompanying CDD checks were done poorly in more than 10% of applications – now there’s an idea whose time might have come…

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