Profit Vultures and Compliance Culture

While we may learn from mistakes, it's also vital to assess when it goes right. Asking for feedback on these topics can turn up these stories. These positives can easily be shared in a year-end employee newsletter.

In our other article this month, concerning annuities, we discussed the reputational disconnect on annuities: American’s want them, the DOL thinks they may raise fiduciary concerns. Perhaps our thoughts on reputational disconnect were top of mind when the verdict against Sam Bankman Fried, the former head of crypto-currency firm FTX, was handed down. It seemed like only minutes later that a lawsuit against Binance was announced by the DOJ[1] and its charismatic leader CZ Zhao announced his own departure. Some of the shenanigans in these cases, such as Bankman-Fried leaking a personal journal of one of his employees, led to an atmosphere of backbiting gossip in which we aren’t interested in miring ourselves. One takeaway we did have from his trial was how his devil-may-care attitude concerning regulations and business basics, such as accounting software, permeated his various companies. This attitude led us to consider culture and compliance. Unlike cranberry sauce at Thanksgiving, you can never have too much consideration of compliance in the financial industry.

The concerns over Bankman-Fried’s sway away from compliance have been covered by a handful of financial writers. David Jeans and Sarah Emerson’s recent Forbes article may have noted this best when they discussed how profit motivations combined with charisma to ignore compliance: “That he was headed for calamity was inevitable. But with the ecosystem of hype and awe built around him, few heard what he was really saying. Employees, customers, and investors alike all saw the dollar signs being minted from his crypto market makers, including FTX, leaving few reasons to believe what Bankman-Fried had been saying all along [about the system being a Ponzi-scheme]”[2] Binance suffered similar issues. As Axios reported, DOJ complaint, now settled, alleged that the company and its leader ditched compliance rules concerning money laundering in favor of growth.[3]

Of course, to say that FTX’s downfall was due to ethical lapses is perhaps the understatement of the year. In general, most ethical mistakes happen when someone faces a situation for which they weren’t prepared. Even situations where an advisor may know the rules may catch them off guard with how to phrase a response. This is true even when there are specific rules, like the Sarbanes Oxley Act, would seem to apply. Some aspects of compliance in the financial industry aren’t covered by SOX. In those cases, company culture can become paramount.

We defined company culture as “the beliefs that underlie or support the strategic plans of the company.” Strong company cultures can enhance trust and foster efficient decision-making.  Culture may influence how employees behave. It is created by leadership and management actions. Culture is also shaped and reinforced through situations that require a response from management on ethics or core values.  How management behaves impacts company culture. And company culture impacts ethical decisions.

Companies insulate themselves from charismatic leaders through ensuring their company’s approach to compliance and ethics is strong and multi-faceted. That includes both the method and the outcome of company goal setting. This includes goals not based solely on profit – i.e., how those who worked in FTX overlooked the company’s base architecture as potentially Ponzi-adjacent. Instead, consider goals and rewards based on more than specific profit benchmarks, including client retention, customer satisfaction, or innovation.”

It may be worthwhile to assess your company’s current reputation for ethics and compliance. An assessment may show areas for improvement. You might start with an internal survey of your employees. Other options for surveying your reputation can be as simple as a google search or as deep as confidential surveys with clients and former employees. You may want to consider hiring an outside, independent firm to help you identify areas for improvement.

While we may learn from mistakes, it's also vital to assess when it goes right. Clients may want to highlight times where they felt your staff went the extra mile to be ethical. Coworkers may want to share the times their colleagues helped them resolve an issue before it became a compliance nightmare. Staff may want to laud their leaders and managers for how they have created a culture of compliance. Asking for feedback on these topics can turn up these stories. These positives can easily be shared in a year-end employee newsletter.




These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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