The Value of a Necessary Evil

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Over the past few years, I have been polling compliance professionals around the world, anonymously, of course, on how compliance and risk management are treated by their senior management within their organizations.  Consistently and overwhelmingly, the preponderance of responses has fallen on the A side:

The truth is that, whether we acknowledge it or not, a focus on compliance and risk management has always been a hard internal sell.  Although compliance professionals are partly to blame for that, I believe most of the blame falls ultimately with the executive suite.

I have been aware of this for some time now, and even have developed a training program on how to overcome this fundamental problem titled: “The Silent War Between Business and Compliance” and subtitled: “How to eliminate friction and align agendas toward a common goal.”  In it, I focus on how compliance professionals should approach their own professional practice in order to be effective in obtaining the buy-in of the business side of the house.  I emphasize, however, that it is a condition for success that senior management exhibit or are able to develop a minimum degree of integrity and rationality.

Leaders need to understand that, as James Lam has said, risk management is not only about reducing downside potential (the probability of pain), but also about increasing upside opportunity (the prospects for gain).  Someone who really understood that was the former leadership of Remesas Quisqueyana, Inc., the New York City-based money transmitter where I cut my financial services teeth over a decade ago, and whose investors and senior execs truly believed in the strategic value of compliance.

Mohamed Chalabi, former CEO of Quisqueyana and one of the most enlightened leaders I have had the honor to know, once explained to me that exceptional anti-money laundering (AML) compliance systems increase a company’s performance in multiple ways.  For example,

• Competitive advantage: Minimum standards of compliance are ultimately set by regulators.  Exceptional compliance attracts favorable views from regulators.  To the extent that regulators learn of useful advances in AML systems through the effort of companies with high standards, they become useful conduits to disseminate similar standards throughout the industry, hence imparting a competitive advantage to the initiating company.
• Reputation: Exceptional Compliance systems speak to the professional standards set by senior management for the company as a whole.  Adoption in one area makes it easier for management to garner company-wide support for adoption of equivalent standards in other systems such as Internal Controls.  High compliance and internal controls standards raise the eligibility of the company to partner with public corporations, whose compliance and internal controls systems encompass strategic partners as well.
• Shareholder Value: Acquirors are often concerned with possible hidden liabilities arising from past lapses in compliance systems or deficiencies in internal controls.  A spotless compliance record reduces the discount a potential acquiror is likely to apply to the valuation of a business enterprise operating in a high-risk environment.

At Quisqueyana, compliance professionals did not have to sell anything.  The right tone came unequivocally from the top.

In these troubled times in which unprecedented innovations are being met with increasing compliance requirements, and the need to protect our ventures from being nipped in the bud is most urgent, it would not hurt to reflect on what our attitude is towards the inevitability of regulation.

We may whine and whine, but we will still need to comply.  A better choice seems to be to just do what needs to be done in the smartest way possible –by adopting the right attitude and leveraging talent and technology to create a solid foundation for our business’ success.