The ongoing ethics struggle of banks

By Edward Hadas
March 5, 2014

The Swiss Bank Employees Association has told an uncomfortable truth: it was “generally known” that for many years some of their employers profited from customers’ “tax evasion.” That is incontestable, as many of the banks’ managers concede. But the practice, supposedly now ended, raises an important question about ethics and business. Why were neither the managers of the Swiss banks nor their employees worried by this business model?

The hardly hidden truth was included in an Association press release which called on Brady Dougan, the chief executive of Credit Suisse, to apologize for insulting the Swiss bank’s employees.

Dougan, who was trying to explain to U.S. legislators how Credit Suisse had stopped helping Americans escape taxes, said that “some Swiss-based private bankers went to great lengths to disguise their bad conduct from Credit Suisse executive management.” The claim, said the employees’ group, slighted the professionalism of the workforce. Besides, it was “hardly credible.”

That last statement is a little unfair. It makes excellent sense that some eager employees, anxious to bring in new business, and well aware that there was an official policy against aiding tax evasion, hid certain salient facts from their bosses. They knew that full disclosure would just get them into trouble, while bringing in new business would be rewarded, with few questions asked.

But if Dougan is right that the managers were totally ignorant, they hardly look good. After all, the commitment to change the old Swiss banking culture – which asked so few questions that accounts bore numbers rather than names – had started well before 2001, when Credit Suisse seriously began its efforts to clean up its relatively small U.S. private banking operations.

Surely, bosses who were deadly serious about rooting out entrenched habits would have prodded, pried and even prosecuted to show that their institutions would henceforth compete on service, not on secrecy. Instead, for many years they seem to have avoided looking too closely.

If Credit Suisse management was too relaxed about abandoning a flawed corporate culture, it had a lot of company. In almost every financial scandal of the last few years – from rogue traders to organized money laundering, from false disclosures to the manipulation of key interest and exchange rates – insiders who were truly interested could easily have found evidence that something was being done improperly. But in fact, attention was missing and action was scarce.

The explanation is simple. Employees knew they had little to gain from complaining about dubious behavior because bosses were almost always less interested in morality than in earning high returns, retaining key employees and gaining ground against rivals.

In other words, ethical inertia was built into the corporate cultures. The Swiss bankers were generously rewarded for gaining new American customers through practices which they probably knew were incorrect. Their bosses, all the way to the top of the organizations, were even better rewarded for deciding not to ask questions which would probably have elicited uncomfortable answers.

Neither the Swiss bankers who broke American laws nor the bosses who did not notice were especially evil or foolish. Like most businessmen who go wrong, they were surely intelligent people quite capable of moral analysis. However, they chose to smother the voice of their consciences.

It is always a challenge to stay virtuous while pursuing legitimate personal and business objectives. Even in the noblest organizations, the desire to be fair to customers, suppliers and colleagues often pushes in the opposite direction from the pressure to succeed. The pressure to cut ethical corners is much greater in enterprises which have a well-established tradition or practice which is no longer considered acceptable.

It is all too easy for bosses and workers who silence their consciences to find plausible excuses. They can cite loyalty, obedience, industry standards and the need to support their families. The senior executives can also use the tools of bureaucracy, hiding behind shared responsibility and stated commitments to good policies.

Bad corporate behavior is particularly hard to change. When bosses have condemned malpractice in words but rewarded it in deed, employees can be excused for not taking the latest pronouncements too seriously. Even if a few people are fired, consciences remain unheard while the remaining employees wait for a return to normal.

Equally, bosses who would not have risen up the hierarchy without finding ways to get around their stated ethical commitments – generally without admitting that this is what they are doing – will struggle to learn new ways.

Knowledge is the first step to virtue. Despite the workers’ complaint, the Swiss bank employees and their employers seem finally to have admitted that something was deeply wrong with the way they used to work. If this effort at truth and moral reconciliation were repeated throughout the financial and business worlds, and backed up with firm judicial punishments, more consciences might start to be heard.

11 comments

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My brief profession as an accountant saw similar things from inside reputable companies – tax evasion export schemes, secret firm branches in Guernsey, proceeds of arms deals known to be corrupt. All neatly wrapped up. When I asked questions I was told not to.

Posted by BidnisMan | Report as abusive

The way to fix the banks is not to hit with harder regulation and more jail time – they will just manage the process better. The answer is to break up banks into hundreds of smaller banks. Each bank must be locally operated and owned. Then the the game changes – local bankers start to care a little more – local regulators no longer see ‘harmless profiteering’ to be swept under the carpet. Too big to fail is also too big to care if they are unethical.

Posted by BidnisMan | Report as abusive

What’s 50 + 67 equal? I believe it’s 117 Right? So then the year 1967 plus 50 years would equal the year 2017 right?

And the year is now 2014 so in 3 more years the American Freedom of Information Act allows the world to view the first Photographs that must be made public of the USS Liberty Massacre where Israel ordered its Army, Navy, and Air Force to destroy our American war vessel by bombs, Torpedoes, Strafing, and Shooting the American Officers and Enlisted Men in International Sea Waters that immediately killed 37, and wounded 170 that have died and been dying from their wounds in the 1967 Israeli 3 Day War.

No Enteral Flame has ever been erected in Arlington National Cemetery for these brave dead American Soldiers, no mention of their sacrifices in any American High School History Books, no President, Senator, or Representative has shown any public display of gratitude for their courage in this conflict, all those who were there and died have been all but forgotten but in 3 years the world will come to know the truth.

President Johnson was suspected of the JFK assasination by conspiracy theorists and the conspiracy to keep quite the USS Liberty Massacre for the last 50 years came on President Johnson’s shift so is there a link between the two conspiracies with the same man involved?

Posted by 1justmyopinion | Report as abusive

I would say there is no ethics struggle in the banking and investment industry at all. They are quite happy with their current ethics. It is we the people that are not as we have far different ethics than they do. Hence the problem. Ethics are unique to individuals, and can vary significantly within one individual depending on his or her current circumstances. Society has realized this for thousands of years and used laws and regulations to ensure stability, and instilled religion to cope with ethics and morals.
So no, there is no ethical problems with banksters We need to use laws and regulations to control them.

Posted by tmc | Report as abusive

After the 2008 Crash, amid the debris, I saw two separate senior bankers say more or less the same thing, quite independently: “These derivatives etc are so useful, we have to continue with them. We will have to call them something different.”
I’m still not sure they’ve understood.

Posted by seymourfrogs | Report as abusive

“…it was “generally known” that for many years…” Bankers, and those associated with huge amounts of free flowing cash, are not immune to greed, avarice, desires. sooner or later, no matter hwo noble the character, someone will believe they can get away with some of that loost. It has happened before. It is happening now and it will happen in the future. How can this be controlled? Banks and Casinos are a good example of the double standard trust is plunged into. Employees must under go forms of scrutiny, vetin, back ground checks and such before being hired. Once hired they are welcomed and smiles light up the day. Yet, are these employees truly trusted? If they are, why all the cameras positioned in the entrance, in the halls, where your stationed? Casino card dealers frequently must extend their hands before them while well positioned cameras survey the hands flipping up then down then around to prove there is no money stuck on them. There is no escaping.

Posted by toptaciturn | Report as abusive

When the crypto currency market stabilizes for the first time in history there will an alternative to banks. I personally think that banks are now hated by the vast majority of people. I believe there will be a revolution in finance that will place the decision making power back into the hands of the people who own the money. Giving someone your hard earned money and allowing them to use it as they want is a certain recipe for criminal activity and political manipulation. Stop giving your money to those who would control your life with it.

Posted by UScitizentoo | Report as abusive

All the while the US is trying to keep banking ethical – at least talking about ethical banking – crypto currency advocates are claiming that a consumer based currency is somehow going to be the fix. How? Without laws designed to define its use or abuse, how are crypto currencies ever going to be reliable enough to “bank on” without fear they will be prone to act like a mob and as fickle as a mob? Wasn’t that the problem of the pre-crash economy?

People are not generally more ethical than the major financial interests. In fact, they are far less regulated by law. There is far more demand for ethical, or at least legal conduct and proper accounting generally in banks, perhaps not in the area of innovative financial instruments the law hasn’t properly defined, but in terms of honest treatment of their bookkeeping. We at least hear hear about the scandals and they can be prosecuted because they are fewer than the majority of banks.

What was so ethical about a national scale surge of unrealistic real estate speculation prior to the crash? Is getting rich quick ethical or an issue of morality? Is a run up of prices due to popular hysteria and panic, they will be left out, ethical? It was legal but it wasn’t stable. Are stability and ethics the same thing? Ethics and morality don’t quite answer all questions.

The banks were a refection of a national attitude and the mob always wants scapegoats. Investment bankers that can invest in their own stock offerings is something like a perpetual motion machine. Is that a matter of ethics as much as a matter of poor design in an engineering sense? Buying stock too far out on margin is legal and even a privilege of big investors but is it unethical or simply not good sense because it is far too risky and unstable?

Maybe ethics, morality, and stability are being conflated and that’s something only law can define. The problem with stability is, it tends to trap those without. The entrapment leads to war or social revolution. The mass of people are the foundations and take the weight of the edifice. All that rapidly escalating real estate was making the illusion of prosperity when in fact it was a harbinger of collapse. It was more exciting and I had employment but it also made the house I live in the object of rapidly increasing real estate taxes that had nothing to do with the substantial improvement or enlargement of the property, or of the services it used. It was also forcing many to adjust to the changing market even if employment opportunities weren’t keeping pace. Money was becoming larger in numbers but smaller in value, in spite of what official econometrics were saying about the inflation rate.

The economy was becoming poorly designed and was moving faster than it could sustain. It collapsed not so much due to poor ethics (Wolf of Wall Street investment firms aside) as much as poor philosophy about wealth. But ethics and morality don’t provide the answer to good design. That’s the job of the law.

Posted by paintcan | Report as abusive

There’a short way to say this. There were more wolves in the street than were ever on Wall Street. They only think they’re sheet when they meet a bigger wolf.

Posted by paintcan | Report as abusive

sheep not sheet

Posted by paintcan | Report as abusive

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