Regulatory fines and fraud dominate bank governance shortcomings

LAGOS (Capital Markers in Africa) – Fitch Ratings identified more than 600 reports on banks globally with meaningful cases of governance failure between 2020 and June 2022, out of more than 1,500 reports on banks that were subject to financial crime, governance and regulatory issues, or institutional scandals.

First, it indicated that nearly 300 reports fell in the ”regulatory fines” category. It noted that the majority of the fines were minor and consist of small fines for gaps in financial reporting or inappropriate charges to clients. However, it said that some fines were linked to significant regulatory violations, such as major deficiencies in risk management or anti- money-laundering policies.

Second, it pointed out that ”fraud” was the next largest category with about 90 reports, which included cases of tax evasion, bribery and theft.

Third, it identified nearly 70 reports on ”allegations against employees or managers”, which linked individuals to governance failure.

Fourth, it indicated that about 70 reports covered ”money laundering”, despite the increasing regulatory focus on money laundering in recent years.

Fifth, it said that nearly 65 reports in the ”weak controls” category are related to information on banks that failed to spot fraud or other violations by junior employees in branch offices or on trading desks.

Sixth, it noted that approximately 20 reports in the ”reputational issues” category covered a wide range of violations, such as breaches of COVID-19 rules and the misbehaviour by managers and employees, including reports of discrimination and harassment. In parallel, it pointed out that it could take negative rating actions on banks if governance failure results in significant reputational damage to the bank.

Source: Fitch Ratings