Internal systems of compliance monitoring have recently presented us with an alarming collection of spectacular failures. For one example among many, the compliance office at Barclays was alerted to irregularities in the Bank's submissions to the calculation of LIBOR, and a senior compliance officer promised to raise the issue with senior management, but did not do so.
Internal compliance systems suffer from intrinsic conflicts of interest. Like the Chancellor of England, who served as the "King's conscience," compliance officers serve as the conscience of the company. But the King could, and sometimes did, behead the Chancellor -- a lesson that is not lost on modern compliance officers. On the other hand, truly independent monitors of corporate probity are cumbersome, expensive, and may lack expertise and inside knowledge of the corporation.
Until corporate incentives -- mainly, but not exclusively, executive compensation -- are more closely aligned with ethical practices and legal constraints, the role of the corporate compliance program will be relegated to overseeing routine technical matters and correction of lower-level ethical lapses. Stronger protections for whistleblowers, carefully targeted criminal
prosecutions, meaningful statutory revisions to the financial system,
and similar techniques, must all be brought to bear in a coordinated
manner if these incentives are to be changed in an effective way. It remains to be seen if recent efforts in these areas are sufficient and sufficiently timely.
It is not in the nature of organizational compliance programs to be crowns of laurels, but neither can we tolerate them being corporate fig leaves.
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