Minor Lapses Leading to Major Oversights: The Story of Nasdaq's Failure to Follow Up

On December 12, 2023, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a settlement with Nasdaq, Inc. Nasdaq agreed to remit $4,040,923 to settle its potential civil liability for a former wholly-owned foreign subsidiary’s apparent violations of sanctions on Iran.

What happened to Nasdaq could make even the most seasoned Wall Street veterans raise their eyebrows in surprise.

The Story, Shortened:

Nasdaq, the titan of stock exchanges, ventured into new territories by acquiring a Swedish company with trading platforms in Armenia. These platforms catered to various banks, including the Armenian branch of Iran’s Bank Mellat.

Here's where things get tricky. Four years post-acquisition, the U.S. imposed sanctions on Iranian government entities, including Bank Mellat. But Nasdaq, seemingly in a parallel universe, continued its business as usual with the Armenian bank.

The Twist:

Now, before you jump to conclusions about greed-driven motives, here's a twist: the Armenian platforms contributed a mere $16,000 in commissions and fees during the period of these violations. That's pocket change in the financial world. So, it wasn't about the money.

And ignorance? Hardly. Nasdaq wasn't some backwater operation unaware of international protocols. Their polished global business conduct policy and internal risk assessments were proof of their compliance savvy.

So, what went wrong?

The most plausible explanation lies in a lack of follow-up. In a vast organization like Nasdaq, where processes and policies are deeply entrenched, there's a tendency to assume that once directives are set, they will be followed to the letter. However, without regular checks and confirmations, even the most well-intentioned plans can go off course.

The Nasdaq incident highlights an often-overlooked aspect of corporate governance: the importance of continuous oversight. In a complex, fast-paced environment, it's not enough to set up systems and assume they'll run flawlessly. Regular monitoring and verification are essential to ensure that every cog in the machine functions as intended.

This episode underscores the necessity of not just establishing compliance frameworks but actively ensuring their effective implementation at every level. In the world of finance, it's often the smallest lapses that lead to the most significant oversights

The Subtle Art of productive failure. Lessons from Amy Edmondson's book "Right Kind of Wrong: The Science of Failing Well."

In the compliance arena, where errors often come with a high price, the concept of welcoming failure might appear contradictory. But what if I told you that failure could be your most valuable teacher? This is the essence of Amy C. Edmondson's thought-provoking book, "Right Kind of Wrong: The Science of Failing Well." Her insights offer a fresh and much-needed perspective for anyone in the compliance field.

First things first, let’s address the elephant in the room: failure in compliance can indeed have serious consequences. There’s no denying that. However, Edmondson, a Harvard Business School professor with a flair for flipping traditional concepts on their heads, invites us to look at failure through a different lens. She argues that there are different types of failure – not all are catastrophic, and some are actually necessary for learning and innovation.

Imagine you're navigating a maze. Every wrong turn isn’t a step back; it’s a clue to the right path. Edmondson categorizes these missteps into three types: basic, complex, and intelligent. Basic failures are your run-of-the-mill errors, often preventable and straightforward to fix. Complex failures are trickier; they emerge from the unpredictable nature of our work environments. Then there are intelligent failures – the golden nuggets. These occur when we bravely experiment in uncertain conditions, and they’re rich with learning potential.

For people in the compliance world, this is groundbreaking. We’re used to seeing failure as the enemy, something to avoid at all costs. But Edmondson’s theory suggests that intelligent failures are not just inevitable, they’re invaluable. They’re opportunities to learn, grow, and innovate in our approaches to compliance.

Let’s be real – the idea of embracing failure doesn’t mean being reckless. It’s about cultivating a workplace where people feel safe to speak up, make suggestions, and yes, sometimes get it wrong. It’s in these environments that the magic happens. Teams can identify potential risks more proactively, brainstorm creative solutions, and build stronger, more resilient compliance systems.

Edmondson backs up her theory with compelling stories from various sectors, showing how this approach has transformed organizations. For compliance people, these stories can serve as a blueprint for building a culture where learning from mistakes is as natural as celebrating successes.

In short, "Right Kind of Wrong: The Science of Failing Well" it’s an invitation to embrace our human fallibility, to learn from our blunders, and to understand that sometimes, the fastest way forward is to take a step back, analyze our missteps, and adjust our course. So, next time you face a setback in your compliance work, remember: it might just be the kind of wrong you need to steer you in the right direction.

Rising Tides of Financial Crime: Insights from the 2023 Basel

In today's dynamic global financial environment, the persistent threats of money laundering and terrorist financing present significant challenges to both regulatory bodies and financial institutions. The 2023 Basel AML Index, an extensive assessment of money laundering and terrorist financing risks across 152 jurisdictions, provides critical insights into these growing challenges. In this article we explore the essential findings of the Index, highlighting the escalating risks and examining the landscape of cryptocurrency compliance.

A Subtle, Yet Alarming Increase in Risk

The Basel AML Index 2023 reveals a marginal, yet notable increase in the average global risk of money laundering and terrorist financing, rising from 5.25 to 5.31 out of 10. This uptick, albeit small, signals a worrying trend. The areas contributing to this rise include corruption and bribery, financial transparency and standards, public transparency and accountability, and political and legal risks. Notably, the quality of Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) frameworks has remained static, highlighting a need for heightened vigilance and reform.

Declining Effectiveness of AML/CFT Systems

A concerning aspect of the report is the declining effectiveness of AML/CFT systems worldwide, now at a mere 28 percent. This figure is alarmingly low, especially in crucial areas such as beneficial ownership transparency and the prevention of non-profit organizations' misuse for terrorist financing. This decline calls for an urgent reassessment of current practices and strategies to bolster these systems.

The Crypto Conundrum: Compliance in a Digital Age

A significant focus of the Basel AML Index 2023 is on the compliance of countries with the Financial Action Task Force (FATF) Recommendation 15, which pertains to virtual assets. The compliance rate has worryingly fallen from 63 percent in 2021 to 43 percent. Regions where FinTech innovation could be most beneficial, like Sub-Saharan Africa and South Asia, show particularly low compliance levels. This decline underscores the need for robust and adaptive regulatory frameworks to keep pace with the rapidly evolving nature of cryptocurrencies.

Lessons from Estonia: Adapting Regulatory Frameworks

Estonia's experience serves as a valuable case study. After initially adopting lenient regulations on Virtual Asset Service Providers (VASPs), the authorities recognized deficiencies and subsequently strengthened their regulations in alignment with FATF recommendations. This proactive approach highlights the importance of adaptable and responsive regulatory practices in the digital finance realm.

Optimism Amidst Challenges

Despite the challenges, there are reasons for cautious optimism. The proportion of illegal activities on the blockchain remains below 1 percent, suggesting that the vast majority of virtual asset transactions are legitimate. Moreover, regulatory bodies like the EU are making strides towards more consistent and comprehensive regulations to mitigate risks associated with virtual assets.

Success Stories in Crypto Asset Recovery

The Basel AML Index report also highlights notable successes in the seizure of crypto assets linked to criminal activities. The U.S. recovered a staggering $3.6 billion in Bitcoin related to the 2016 Bitfinex hack, and the UK has made significant strides in crypto confiscation. These successes demonstrate the potential for effective asset tracing and recovery in the digital finance sector.

Moving Forward: Embracing the Future of Finance

As we navigate the complexities of financial crime in a digital world, the Basel AML Index 2023 underscores the need for a balanced approach. It calls for embracing the potential of virtual assets while rigorously addressing associated risks. The path forward involves fostering public-private partnerships and international cooperation to develop regulatory frameworks that protect and promote a thriving global FinTech industry.

Corporate Missteps in the Federal Spotlight: Dodging the Compliance Boomerang

The latest report from the U.S. Sentencing Commission serves as a vital barometer for understanding trends in corporate accountability and the ongoing vigilance of federal oversight, particularly outside the Foreign Corrupt Practices Act (FCPA) domain.

Steady Enforcement in a Dynamic Landscape

First off, let's tackle the big picture. Even though we're seeing fewer FCPA-related pre-trial agreements, the overall rate of companies sentenced for other federal crimes hasn't missed a beat. The numbers have been quite consistent, with only slight fluctuations over the last five years. This trend suggests a steady hand in federal enforcement, reminding us that accountability remains a top priority.

Who's Catching the Federal Eye?

Now, who's in the spotlight? A vast majority of the sentenced companies are U.S.-based, totaling 89.9%. Their corporate structures vary, with a notable split between closely-held/private companies and limited liability companies, each making up about half. Publicly traded companies, interestingly, account for only a small fraction. It paints a diverse picture of the corporate landscape under scrutiny.

Being small doesn't make you invisible

Here's something that might surprise you: smaller companies, those with fewer than 50 employees, represent a significant 81.4% of the sentenced firms. It's a clear signal that size doesn't exempt anyone from federal oversight. And let's not overlook the issue of recidivism. A notable 15.8% were repeat offenders, highlighting the importance of robust compliance frameworks within organizations.

The Leading Offenses

Fraud is leading the pack of federal offenses, accounting for 40.4% of cases, spanning from mail and wire fraud to healthcare fraud and false statements. But that's not all. We also see a substantial number of environmental violations, money laundering, and import/export crimes. Each of these areas presents its own set of challenges and lessons for companies aiming to stay on the right side of the law.

The Price of Non-Compliance

The financial stakes are high. Companies found non-compliant faced significant fines, averaging $9.4 million, along with hefty restitution orders averaging $256.8 million. Some also faced forfeiture orders, underscoring the severe economic impact of non-compliance.

Proactive Measures: Compliance and Ethics Programs

An interesting development is the court-ordered implementation of compliance and ethics programs, mandated in 21.2% of cases. This trend reflects an increasing emphasis on proactive measures to foster corporate integrity and prevent future missteps.

Individual Accountability: A Growing Trend

A standout feature of recent enforcement actions is the focus on individual accountability. In over 60% of these cases, individuals, alongside organizations, faced indictments. This approach underlines a broader commitment to ensuring personal responsibility at all levels within a corporation.

Wrapping Up

The latest from the U.S. Sentencing Commission is a vivid reminder that in the corporate world, the compliance boomerang always comes back. Whether you're a small startup or a towering corporation, it pays to play by the rules. Stay informed, stay ethical!