There is a concern by the U.S. correspondents 2  BIS central bankers’ speeches  transferring funds for Middle Eastern customers that the correspondents might unwittingly be providing services to a terrorist organization, or be enabling a person or affected sovereign to evade economic sanctions. So, the correspondents close accounts for all banks in the Middle East. Similarly, there is a concern by the U.S. correspondents transferring funds for Latin American customers that they might unwittingly be providing financial services to drug traffickers, a money laundering risk. So, they close accounts for all banks located in Mexico, Venezuela and Colombia. The de-risking exercise succeeds in its risk-reducing objective, but it succeeds in an overly broad manner by cutting services indiscriminately to so many. The adverse and unintended consequences for certain regions of the world are clear and present. There are also implications for U.S. policy with respect to the role of the dollar as the international medium of exchange. These issues, while highly consequential, are not the object of my remarks today; rather, they are a symptom of what compliance can lead to – namely, a reason to restrict business activity. Given the size of penalties for violations, and the potential reputational damage associated with this business, it is very difficult to quarrel with the business judgment. The success of compliance over the last 20 years has conditioned business leaders to think about compliance as a pathway to terminate or constrain a risky business relationship.
We reason backward, “if the program were effective, this would not have happened.” I think this is natural and understandable for the enforcement community, but it is not necessarily good policy. To borrow an observation from Senator Ted Kennedy concerning the Federal sentencing guidelines, this creates “a risk that companies without substantial compliance programs will get a free ride, and those with strong programs will not receive the credit that they deserve.”3 Alternatively, if there were a reliable and acceptable measure of program effectiveness, this kind of backward reasoning would be replaced by reliance on the effective measure. Institutions could use the measure when making arguments for leniency, again assuming that the measure demonstrated that their programs were effective. It might, of course, show just the opposite. And there are other, perhaps even more important, benefits. If an industry and its regulators came to have great confidence in a particular effectiveness measure, this might provide a foundation for building a program that could be used to on-board risk. Put differently, a particular organization could have confidence that its ethics and compliance program would be protective because the program had been validated by a well-accepted measure of effectiveness. Some of the skeptics will say “you are dreaming”. When I hear them, I am reminded of the words of George Bernard Shaw, and specifically the reminder to dream things that never were and ask “why not”.4 4.