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, 7 October 2005, there are some key considerations in implementing the system[6]:

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.   

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[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/