Strong Know Your Employee (KYE) Program Needs
Whistle Blowing and Reverse Burdens of Proof System
As
we know that enemy within is as dangerous as criminals outside. We have learned
that one or some employees can cause the same or an even greater threat of
money laundering as can be done by a bad customer. For example, a criminally
co-opted public service employee might facilitate inside trading or information
leaking. Thus, Know Your Employee (KYE) Program is seen as crucial to a
financial institution's protection against money laundering as knowing its
customers.
Furthermore,
many financial institutions have expensed a lot of money to put firmly in place
KYE program comprising policies, procedures, internal controls, background
screening of potential employees, conflict of interests assessments, job
descriptions, code of conduct/ethics, levels of authority, compliance with
personnel laws and regulations, accountability, dual control, segregation of
duties and other deterrents. They also put red flags of suspicious activities
of their employees in order to detect and prevent money laundering crime assisted
by employees as early as possible.
Theoretically,
there are some common red flags of suspicious employee activities that are
commonly used as examples, such as:
Ø
Employee exaggerates the credentials, background
or financial ability and resources of a customer in written reports the bank
requires;
Ø
Employee frequently is involved in unresolved
exceptions or recurring exceptions on exceptions reports;
Ø
Employee lives a lavish lifestyle that could not
be supported by his or her salary;
Ø
Employee frequently overrides internal controls
or established approval authority or circumvents policy;
Ø
Employee uses company resources to further
private interests;
Ø
Employee assists transactions where the identity
of the ultimate beneficiary or counter party is undisclosed;
Ø
Employee avoids taking vacations.
However, considering recent
conditions, I think that those KYE approaches including red flags are just not sufficient
enough to identify suspicious activities. It is easy for a bad employee to
avoid them. Many employees may easily not show off their wealthy in order to
avoid others suspicious. Red flags are just indicators of possible fraud that
can be easily evaded by wrongdoers since they know precisely what actions can
be categorizes as suspicious activities.
Moreover, some recent data
reveals that there are no unique characteristic of a fraud perpetrator[1]. Many
employees and employers seemingly having excellent reputation are also possible
to commit in frauds, corruptions, embezzlements, extortions, and other
white-collar crimes. The characteristics and behaviors of frauds perpetrators do
not necessarily “anomalies”. They can be married, have well education, an
employment record of one to more than 20 years, range in age from teens to 60s
or even beyond, no criminal record, are socially conforming, and are likely to
belong to a church[2]. The person likely to
commit next fraud could be anybody in the office because, under the right set
of circumstances, anyone could become a fraud perpetrator”[3].
Thus,
I, personally, believe that strong KYE program could not merely rely on KYE
approaches including red flags. Indeed, it needs additional components such as
whistle blowing system and reverses burdens (transparency) especially for high
level authorities in order to prevent “enemy within”.
Whistle Blowing System
“A whistleblower is an employee or other
person in a contractual relationship with a company who reports misconduct to
outside firms or institutions, which in turn have the authority to impose
sanctions or take other corrective action against the wrong-doers”[4].
The
following research below showed that 64.1% occupational frauds were detected and
reported by employees (whistle blowers). Other reports came from outside
information such as from vendors, customers, and anonymous with totally of
35.9% Source: 2006
ACFE Report to the Nation on Occupational Fraud and Abuse[5]
The
report shows that whistle blowers in a good faith can be an effective tool to
detect and reveal the internal frauds, even much more effective compare to
traditional KYE program. I believe that peer group supervision is much more
effective and efficient rather than top down supervision since the later has a
lot of limitations to scrutinize employees’ daily activities. In early stage of
its implementation, whistle blowing system may increase a feeling of
uncomfortable and insecure among employees, but in the future, it may increase the
awareness of employees about the dangerous of committing crime by someone or a
group of people for the whole company safety. If somebody commits crimes, his
or her action will threat the entire company safety including most of good employees’
interests. The illicit actions conducted by one or some wrongdoers often become
the heavy burdens carried on all employees’ shoulders. This awareness is a very
important key to implement whistle blowing system successfully. Furthermore, encouraging
and protecting all employees to involve in company’s protection program by providing
strong supports and commitments from management, and opening secret, sterile
and secure hot line services become crucial ones. Another issue is that keeping
intensive contacts to complainant and paying attentions to his or her reports
can detect the illicit actions. Moreover, it can prevent the whistle blower to
report his or her complaints through mass media that can damage company’s good
reputation.
According
to Teen, Co-Director, Corporate Governance and Financial Reporting Centre who
presented the Whistle Blowing: Developments and Implementation Issues at Institute of Internal Auditors Annual Conference
Ø
Procedures of submitting complaints and the
official address to submit to (e.g., legal/compliance, audit committee,
external hotlines);
Ø
Types of offensiveness which are covered
(accounting irregularities, theft, fraud, corruption/dishonesty, harassment,
unethical behavior, improper conduct, workplace safety hazards, breaches of
legislation);
Ø
Investigation, follow up and reporting processes;
Ø
Types of prohibited retaliations (e.g.,
discrimination, harassment, intimidation, demotion, termination, etc.); and
Ø
Policy regarding whistleblower’s immunity from
disciplinary proceedings and civil/defamation claims.
However,
although a whistle blowing system has a lot of benefits; it is not a panacea
that can solve all problems related to white-collar crimes. Moreover, it also
has some negative impacts if not used properly, such as the system may be
abused by someone or group of employees to defame innocent rivals. If there is
no secure and secret line for whistle blowing system, bad news of accused one will
easily become black campaign to destruct his or her reputation. Remember that a
bad news and rumors are usually easier to be generally trusted by most of
people. Another potential bad massive impact is if a whistle blower does not
feel that his or her report is handled properly by company internal authority
or management, they may speak out through mass media that can damage
institution’s reputation severely.
Reverses Burdens of
Proof Program
Actually
reverses burdens practices have been known and implemented since a long time
ago. The problem is in the hands of whom the obligation to provide evidence
must be carried out. Traditionally, many people believe that if you assert
someone doing wrong things, you should be able to prove his or her mistake. Thus,
the obligations to prove all elements of offence are in hand of prosecutor(s).
It based on the opinion that one of the fundamental principles of criminal
justice is the presumption of innocence[7].
However,
recently many people consider in the name of fair justice and protect bigger society’s
needs of safety; it seems that a lot of people need new methods to prove the
wrongdoers’ illicit actions. If we link it to company, many honest employees
who do rely on continual company’s long live may agree that internal wrongdoers
are not easily to be catch merely based on whistle blowing reports. Whistle
blowing is merely a trigger for further investigation to the accused persons. To
prove whether somebody has commit crime or not, accused person not only should prove
the neat documents of his or her duty jobs, but also if needed, they may have
to prove that his or her “variance” belongings are not derived from ill-gotten
money compared with his or her standard known incomes.
Although
I do not try to simplify the situations, it is quite easy to prove whether the
money or belongings come from legal sources or not. The simple formula is employee’s
wealthy and belongings should be able to be supported by his or her incomes.
Then, if there is an excess wealthy that cannot be supported by his or her
incomes, the accused person should demonstrate that the excess is derived from
legal sources, for instance from inheritance or other side job income. Furthermore,
their belongings should be also supported by legal documents. Full access to
employees’ private account and belongings is a compulsory. Thus, the company
authority, without deposing or reducing or substituting legal actions that may
be taken by government authorities, should have full access to their employees’
wealthy and have rights to fully investigate and track the sources of money.
Conclusion
Although
there are some impediments that may hamper the implementation of whistle blowing
and reverses burdens of proof system, such as potential abusing of the systems
for defaming innocents and black campaign, I do believe that considering the
necessity of effective KYE Program, it should consider whistle blowing and reverses
burdens of proof systems as additional complementary tools. In addition, in order
to protect the reputation of both complaint and accused persons, whistle blowing
and reverses burdens of proof systems should be firmly in place of secure,
secret, and safety line with only limited authorized persons who can open it,
like a company hot line.
[1] http://www.fraudcorp.com.au/Hotline%20News.pdf.
Accessed on February 26, 2008
[2] http://www.fraudcorp.com.au/Hotline%20News.pdf.
Accessed on February 26, 2008
[3] http://www.fraudcorp.com.au/Hotline%20News.pdf.
Accessed on February 26, 2008
[4] http://goliath.ecnext.com/coms2/gi_0199-6711263/Getting-the-word-out-about.html.
Accessed on February 26, 2008
[5] http://www.acfe.com/resources/publications.asp?copy=rttn.
Accessed on February 26, 2008
[6] http://www.cgfrc.nus.edu.sg/download/IIA_Conference/The_Challenges_of_Whistleblowing_Implementation.ppt.
Accessed on February 27, 2008
[7] http://www.hart.oxi.net/updates/crimlaw/crimlaw_burden05.htm.
Accessed on February 27, 2008
The author is a public official in a ministry in Indonesia. The views
expressed are his own and do not reflect the official stance of the institution he is working. His writing is not intended to vilify particular
persons or institutions. He blogs at http://whistleblowing-indonesia.blogspot.com/
