Wednesday, April 6, 2011

All your have is your name and reputation

The Globe and Mail had an article entitled Does your investment adviser put you first? The article amounted to an endorsement of the CFA Charter:
The best advisers in this country already work to a fiduciary standard, but they’re not easy to spot in a financial industry where generating revenue from clients is the main objective. One approach is to look for advisers who have earned the Chartered Financial Analyst (CFA) designation.

CFAs are the paratroops of the investment advice industry. They’re trained to a higher standard and more is expected of them. Each year, they’re required to sign off on a code of conduct that includes a clause saying CFAs “have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.”
I received my CFA designation in 1989. I haven't retained much of the study material from the exams, but the one thing I do remember very vividly is the CFA Code of Ethics. I have come to recognized that in this business, all you have is your name and your reputation. If either of those are tarnished, they are tarnished forever.
Consider the case of David Sokol. I have not commented about the Sokol affair because I don't have very much to add. My personal opinion is that what he did was likely not illegal, but unethical. Regardless of the legal consequences and any fallout from any investigation that may ensue, the reputation of all those involved have been damaged by this affair.
Real-time ethical dilemmas
Frequently, ethics training doesn't go far enough. While it is important to impart an understanding of the ethical standards to students and trainees, most organizations don't want to take the sensitive next step of involving people in discussions of ethical dilemmas. Consider, for example, this Guardian story of Wachovia being accused of laundering $378.4 billion for the Mexican drug gangs.
There is no doubt that such a volume of funds flowing through the bank was a lucrative business, but it seemed that the business didn't pass the smell test [emphasis added]:
When he looked at Wachovia, the first thing Woods noticed was a deficiency in KYC [Know Your Client] information. And among his first reports to his superiors at the bank's headquarters in Charlotte, North Carolina, were observations on a shortfall in KYC at Wachovia's operation in London, which he set about correcting, while at the same time implementing what was known as an enhanced transaction monitoring programme, gathering more information on clients whose money came through the bank's offices in the City, in sterling or euros. By August 2006, Woods had identified a number of suspicious transactions relating to casas de cambio customers in Mexico.

Primarily, these involved deposits of traveller's cheques in euros. They had sequential numbers and deposited larger amounts of money than any innocent travelling person would need, with inadequate or no KYC information on them and what seemed to a trained eye to be dubious signatures. "It was basic work," he says. "They didn't answer the obvious questions: 'Is the transaction real, or does it look synthetic? Does the traveller's cheque meet the protocols? Is it all there, and if not, why not?'"
Also consider these obvious red flags:
Over two days, 10 wire transfers by four individuals "went though Wachovia for deposit into an aircraft broker's account. All of the transfers were in round numbers. None of the individuals of business that wired money had any connection to the aircraft or the entity that allegedly owned the aircraft. The investigation has further revealed that the identities of the individuals who sent the money were false and that the business was a shell entity. That plane was subsequently seized with approximately 2,000kg of cocaine on board."

Many of the sequentially numbered traveller's cheques, of the kind dealt with by Woods, contained "unusual markings" or "lacked any legible signature". Also, "many of the CDCs that used Wachovia's bulk cash service sent significantly more cash to Wachovia than what Wachovia had expected. More specifically, many of the CDCs exceeded their monthly activity by at least 50%."
When training people in ethics, they need to be confronted with ethical dilemmas. On one hand, you have the potential for a very large volume of business. On the other hand, the transactions have a distinct unpleasant odor to it. What do you do?

I reiterate my belief that at the end of the day, all you have are your name and reputation.

1 comment:

dixie_flyer said...

shame on have violated the CFA Institute ethical standards by not properly using the term "CFA Charterholder" ironic that you have done so in a missive about ethics