What are the main challenges to preventing market abuse and/or fraud at the highest levels within organisations?
While the majority of organisations in the UK (and similarly governed jurisdictions) today are ethically run, with appropriate checks and balances to prevent market abuse and fraud, there are exceptions.
Where wrongdoing, or the potential for wrongdoing, is a problem, the biggest challenges are often cultural ones.
In hierarchical organisations, where employees either fear or are expected to show deference to managers, those at the top of organisations are very often not subjected to the sort of challenge and scrutiny that promotes ethical conduct.
To the extent that those at the top of an organisation tend to operate with more autonomy and independence, it will also generally be harder to monitor these individuals.
This tends to affect the potency of those who have responsibility for compliance, who may find themselves undermined and marginalised by management.
Even in organisations with a positive corporate culture, the reality is that most executives are not routinely questioned or challenged.
This can all lead to a sense of invincibility among senior management, and a temptation to ignore their organisation's policies and procedures, and the law itself.
One of the most high-profile and egregious examples of such behaviour in recent years is the Stanford Bank Case, which involved Allen Stanford and other senior executives in the bank operating a US$7.2 billion Ponzi scheme affecting some 18,000 investors.
In short, Mr Stanford persuaded investors to part with their money by promising significant returns, but then used new deposits to fund payments to existing investors and an extravagant lifestyle. He forged and destroyed documents, and paid bribes to professional advisors to avoid detection, while his colleagues at the top of the organisation failed to hold him to account.
What checks and balances should companies put in place to ensure executives are not abusing their positions?
A strong focus on effective governance, and the recruitment of independent, experienced, and robust non-executive directors will ensure executives are subject to rigorous checks, challenges and accountability.
Similarly, ensuring those appointed to senior roles in support functions of the business, in particular the legal, compliance, finance, and audit functions, have the skills and experience to command the respect of senior executives is key.
Regularly refreshing compliance procedures, rigorously enforcing engagement with internal training, and fostering a culture of respectful challenge, will all play an important role in deterring bad actors.
As part of this corporate culture, employees and management should feel safe and supported to speak up, something which can be facilitated through the provision of a reliable and discrete whistleblowing procedure.
What are the implications for organisations if senior executives are caught committing market abuse or fraud?
Typically, if senior executives are implicated in market abuse or fraud, that means the organisation itself is implicated.
For listed companies in the UK (and elsewhere), allegations against individual executives can affect the company's share price and prompt uncomfortable questions from regulators and shareholders.
For all companies, listed and private, the impact on customer trust and employee morale can be profound.
Customer and investor distrust can have severe financial consequences for a business, while the internal impacts can lead to the loss of talented employees.
Day-to-day management of the business may also be affected if significant amounts of management time is spent responding to any investigation and dealing with the reputational effects of allegations or convictions, which in turn can have a negative impact on profitability.
How is fraud/market abuse typically detected?
There are numerous ways in which misconduct within an organisation comes to light.
There is an upward trend in the use of companies' whistleblower hotlines, and an increasing willingness of individuals raising concerns to identify themselves, no doubt encouraged by the more robust protection in place for those who blow the whistle.
This is leading to an increase in internal investigations and can improve exponentially the prospects of allegations being substantiated.
Notwithstanding some recent high profile auditing failures, audits in general remain an important process of checking a company is operating within the rules and promoting transparency.
The media (via investigative journalists), while often a major headache for businesses trying to preserve their reputations and focus on investigations/righting wrongs, has played an important role in bringing corporate wrongdoing to light.
Law enforcement agencies also continue to identify targets for investigation.
Obviously, the best advice for organisations is to ensure they do not attract suspicion/give media or law enforcement a reason to probe their affairs, as even the suggestion of wrongdoing, which may ultimately turn out to be baseless, can be hugely damaging for a business.
This article was authored by Quinton Newcomb, Head of Commercial Crime at Fieldfisher.
Sign up to our email digest
Click to subscribe or manage your email preferences.