Money, suspicion, and fraud: When client-bank relationship becomes a complicated affair

Financial scandals involving business moguls, well-known political figures, and even famous artists made the headlines in 2017. What is so alarming about the recent scandals, made public through the leaked Panama and Paradise Papers, is that they implicate several financial institutions, including a Canadian bank. Reportedly accepting their wealthy clients’ attempts to evade taxes and, in some cases, even encouraging them to set up offshore companies, some of the implicated banks later on simply claimed that they were not aware of their clients’ wrongdoings.

Although the leaked files expose illegal financial interactions between banks and wealthy individuals, any clients can actually commit fraud in their banking activities. If such fraud truly happens without the financial employees’ support or knowledge, how can banks detect their clients’ financial misconducts before they take the proportion of a public scandal or, worse, contribute to a financial crisis? Collecting and analyzing data from five banks in emerging economies for a research project entitled, “Can banks anticipate corporate misconduct”, Telfer School of Management Professor Lamia Chourou explains that, once a banking scandal goes public, our first reaction is to finger point at the banks’ clients. Professor Chourou and her team however believe that banks do play a major role in identifying their clients’ fraud upon suspicion and even reporting them if necessary.

Suppose a long-term client approaches a loan officer and provides a fake or outdated financial document. Having developed a very personal relationship with the client and looked over his/her investments for years, the officer senses something is unusual this time. Should the loan officer ask the client for additional information, talk to a supervisor, make the lending agreements tougher, or simply flag the client? Although these seem to be all very reasonable choices, in reality, client-bank relationships are far more complex than we think. Many bank employees may also lack the necessary support to make the “right” decision. According to Professor Chourou, we still know very little about how financial institutions operate when facing their clients’ fraudulent intentions. Therefore, it is hard to tell if and how banks handle such misconducts internally.

Understanding the role banks play in fraud identification, more generally, and their financial employees’ actions upon suspicion of their clients’ practices, more specifically, has enormous values. Professor Chourou’s insights will help banks improve their preventive regulations and better train their employees. Additionally, her research findings will help banks implement a more effective bank-client communication system, such brochures and newsletters, through which they can inform clients about the dangers of illegal financial activities.

If the 2008 crisis didn’t teach us anything about unethical financial decisions undermining the credibility of some of the largest financial institutions around the globe, making sure that banks carefully review their own clients’ suspicious activities will not only save their face but also benefit society.