Originally published by Thomson Reuters Accelus™ on October 30, 2013
The main duties of compliance officers are normally to ensure standard procedures are followed in processing clients’ transactions, with the assumption that all staff want the organisation to be successful. The compliance officer would not normally expect to need to recognise deception or that there are co-workers who want some corporate endeavours to fail.
However, it is most likely that in the course of his career he will come across the “white-collar psychopath” (synonymous with sociopath) who will deliberately try to subvert the system of corporate compliance. Psychopaths are narcissists who exude a superficial charm and courtesy that conceals their real intentions, which are to benefit themselves at the expense of others.
Most people, including compliance officers, will not be able to identify such deception unless they are aware that such an aberrant and destructive personality exists. To a certain extent the finance industry even encourages a degree of psychopathy by its frontline deal makers and traders with the “end justifies the means” attitude.
This is manifested in behaviour such as the single-minded focus on making a profit in the current short-term reporting period, irrational risk-taking behaviour tantamount to gambling, the acceptance of exploiting and deceiving others in transactions which are a zero-sum game, all of which will result in accolades and financial rewards if they succeed.
More common than the extreme cases of psychopathy seen in executives involved in corporate collapses is the “sub-criminal psychopath”, who may not necessarily steal but can still be destructive to an organisation as well as to individuals.
Although sub-criminal psychopathy might not lead to crime it might still lead to conflict of interests where one party will gain an advantage to the detriment of others, and often this conduct could invoke administrative sanctions for regulatory violations.
Representing a small proportion of society, at approximately 1-3 percent, they are highly skilled at deception and manipulation of others, for whom they feel contempt for being able to be manipulated, and they themselves feel superior for their ability to exert such power over others. Their belief in their own intrinsic superiority is so deep that it becomes a self-fulfilling prophecy; their confidence gets them into management positions, which makes them even more dangerous.
For example, how does a compliance officer challenge a person who has direct authority over him? The dangers for compliance officers are not only that they themselves could be persuaded to deviate from the rules, but also that ethical people with no alternative agenda could be cunningly persuaded by the psychopath to accept irregular procedures.
The manipulative personality will normally persuade others to break the rules on their behalf, so no paperwork exists with their own name on it showing their own complicity. A compliance officer must therefore be aware of situations where operational staff are not being dishonest or negligent, but have been subtly manipulated to accept inadequate documentation or procedures.
The psychopath has the ability to persuade others to commit “crimes of ‘moral disobedience”. Much academic research has been done on this topic, initiated in part by the increasingly common occurrence of large white-collar corporate scandals that have destroyed many companies and impoverished stakeholders, except the psychopaths who exercise “leadership by manipulation”.
Through a process of rationalization, a psychopathic manipulator can persuade ethical people to become “morally disengaged” from their acts, thereby inducing an ordinarily honest person to deviate from the rules, or even commit a dishonest act on their behalf.
These acts have also been classified by psychologists as “crimes of obedience”. Be aware, however, that charismatic leadership is not in itself an indicator of a destructive personality Researchers have observed that power can be either socialised or personalised: those who exercise socialised power feel connected to society and have a strong sense of justice, whereas those who exercise personalised power view life simplistically as a game of individuals, where winning means causing someone else to lose.
The compliance officer should be alert to the traits of a psychopath existing either within his company, or suborning staff from without. There are numerous checklists on the Internet listing these traits. They include: denigrating the knowledge of others while not hesitating to espouse as experts on subjects they have minimal knowledge of, a sense of entitlement, arrogance, a high verbal facility, gain gratification from denying to others what is entitled to them, bullying, a glib liar, taking credit for the work of others while transferring blame for their own failures onto others, being obsequious and ingratiating, contempt for anyone who has any skills they themselves do not have, a contempt for clients, and one unusual trait common to many sociopaths – claiming to have had a childhood experience of overcoming an adversity of being bullied or otherwise victimised, which then becomes a rationalisation for their present behaviour.
When a psychopathic leader persuades several people to become involved in non-compliance then the guilty party becomes not the individuals involved, but the whole company, with consequential reputational harm to the company brand name and resultant loss of trust and customers. In the worst case, a psychopathic manager can change the corporate culture of a company to one of accepting non-compliance with regulations as the norm.
Researchers in organisational behaviour and leadership have been able to explain how in the most extreme cases a politically astute leader has created an organisational environment where employees are persuaded that they have no choice but to do their jobs in an a manner akin to automatism, without regard to the consequences. Otherwise moral people will act in this way if they believe there are no victims, or the victims are too far removed from their actions for responsibility to be attributed to them. In such a situation the whole company could then be classified as being criminal, as opposed to attributing responsibility to selected staff.
Tax evasion and corruption are examples of crimes that may be perceived as victimless crimes, when the reality is that the victims are often all of society. In such a dysfunctional environment a compliance officer would face an extreme challenge of changing the corporate culture by teaching the organisation that there are negative effects and victims to crimes such as tax evasion and corruption. Nevertheless, this is where the compliance officer will have to accept being in a state of virtual war.
However, war is really just an expression of power politics. If political skills can be used to corrupt compliance then political skills must be used by the compliance officer to counter this and enforce compliance. To this end, the compliance officer must be a manipulator of sorts. When the concept of ‘compliance’ started to be introduced into the financial industry, with the realisation that financial institutions could be held liable for aiding and abetting financial crimes, there was considerable resistance.
I have heard bankers protest about handing over financial records to regulators on the grounds that their responsibility is to their clients, similar to a “client-attorney” relationship, saying they would hand over as few records as possible. Such an attitude would then make it difficult to detect “structuring” of money flow, since records would be incomplete. Meanwhile, the bankers would not feel that they had any responsibility, allowing their services to be used for criminal purposes.
The mere fact that compliance officers now exist, when they previously did not, shows that the corporate culture of the financial industry has changed. Compliance officers now need to be able to exert more authority and political influence within the organization and to understand psychology, especially if they are to effectively counter the psychopathic manipulator who is suborning the system. Compliance is a job only for those prepared to engage in conflict.
Julian Russell is director of Pacific Risk, a boutique business and political risk advisory in Hong Kong.