A conflict of interest happens when a person with multiple interests serves one to the detriment of another. For example, an individual may seek to create personally-beneficial outcomes at the expense of fairness and competition. They may engage in activities that put the confidentiality of their firms’ information at risk or put personal financial gains ahead of their firms’, clients’, or broader financial market’s interests.
While individuals may seek to gain short-term benefits, conflicts of interest can ultimately result in harsh financial penalties, reputational damage, and even personal imprisonment in severe cases.
Conflicts of interest arise in a variety of forms. This article takes an in-depth look into recent examples of conflicts across the Asia-Pacific (APAC) region concerning bribery and corruption, outside business activities, insider trading, and virtual assets trading.
Mr Yeo, acting without the knowledge of AIG and Liberty, engaged in bribes to an Indonesian Embassy official totalling SGD $71,211 on 8 occasions. These bribes persuaded the official accrediting AIG and Liberty to sell performance bonds to employers of Indonesian foreign domestic workers.
Mr Yeo also provided SGD $21,363 across 10 occasions to another individual for arranging with the embassy official to show favour to AIG and Liberty in the accreditation.
Mr Yeo used his commissions from the sales of those AIG and Liberty performance bonds as funds for the bribery amounts.
Unethical and illegal behaviours often occur due to an individual’s risk vs rewards decision-making processes. Help employees gain a deeper understanding of conflicts of interest - and the consequences - by driving a culture that supports and promotes ethical decision-making.
Actively communicate your conflict of interest policies, regulatory compliance requirements, and the enforcement actions taken by regulators.
Support staff with ongoing training and help them engage in open communication so they can raise questions and concerns in a safe environment. Also, provide clear guidelines for reporting potential conflicts of interest and communicate policies for the confidentiality of “whistleblowers” identities.
Last year, IT services giant Wipro fired 300 employees for allegedly “working for rival companies”. Chairman of Wipro, Rishad Premji, shot down the practice of moonlighting in a tweet: “There is a lot of chatter about people moonlighting in the tech industry. This is cheating - plain and simple.”
Mr Premji further explains in a TechCrunch report, “As part of transparency, individuals can have candid and open conversations around playing in a band or working on a project over the weekend. That is an open conversation that the organisation and the individual can make a concerted choice about, on whether that works for them or doesn’t.”
While the moonlighting or side hustle phenomenon is not new, it presents unique challenges in India, where many companies have stringent contracts and policies discouraging employees from working elsewhere.
Particularly during economic uncertainty, moonlighting can provide employees with an added sense of security - whether due to fears of redundancies, roles and lines of reporting, or wanting to gain more financial stability.
However, conflicts of interest can arise when employers are unaware of their employees’ moonlighting activities. These conflicts may occur due to the individual working with a direct competitor or due to risks such as confidentiality of information, data security, and the nature of work undertaken.
To manage outside business interests more effectively, your firm must have a documented policy that helps employees know what is or isn’t acceptable. Ensure employees are aware of your policy, and consider whether some OBAs should be approved or denied automatically based on the nature of the work or companies with which the individual may engage.
Enforce annual attestations of outside business activities to continually remind employees of your policies and allow them to declare any outside interests that have changed or ended - or any new activities. The appropriate RegTech (regulatory technology) solution will also make it easy to manage attestations and help employees declare outside business activities and interests more efficiently.
Read more about how to help your firm’s OBA compliance go beyond just disclosures.
In March 2023, authorities sentenced former Tesla Director Kurt Schlosser for two insider trading offences. The sentencing attracted two years and six months imprisonment, to be released immediately upon entering into a recognisance, on the condition that he be of good behaviour for two years and six months.
Schlosser acquired 86,478 shares in the mining company “Piedmont Lithium Limited”. Lithium is a critical material in electric-car battery packs and is vital to the production of Tesla’s electric vehicles. Schlosser purchased shares in the mining company after gaining inside information, through his role as country director of Tesla Australia, of an in-principle agreement that Tesla had reached with Piedmont for the supply of lithium. After details about the deal became public and Piedmont’s share price rose, Schlosser sold his Piedmont shares for a net profit of $28,883.53.
This case highlights the risk vs reward decision-making process of those willingly engaging in conflicts of interest. A $29K profit for the former Country Director of Tesla seems a relatively small amount to risk significant time in prison.
Read more about the Schlosser case and its outcomes.
Your firm must proactively monitor personal trading activity and maintain records of people with access to MNPI to reduce conflicts of interest risk. Clearly define how you will monitor, regulate, and report on securities trades, with particular note of directors, executives, management, and anyone with access to MNPI.
Communicate your trading policies and provide guidelines for reporting conflicts through continuous training mechanisms. Employees should also understand blackout periods and preclearance processes for the approval or denial of personal trades.
Your personal trading policy should mandate the disclosure of any conflicts of interest (such as possession of MNPI). Have a system for recording additions and changes to potential conflicts, and make it part of your processes to monitor personal trading activity.
RegTech solutions, such as MCO’s Personal Trade Manager (PTM), can also be implemented to automate these processes in line with your firm’s policies. Compliance resources can save significant time while ensuring full audit trails of all requests, approvals, and denials by using a compliance management software solution instead of outdated manual processes.
The global cryptocurrency market saw an estimated USD $300 billion in losses after Luna and TerraUSD crashed, causing ripples of devastation throughout the crypto market. Read more about these and other impacts on the virtual assets market in our eBook, Cryptocurrency: a Time of Turmoil or Hope Ahead?
In 2023, many regulators are transitioning from a light-touch approach, previously focusing on anti-money laundering (AML) and counter-terrorism, to regulating from an investor protection perspective. Hong Kong’s Securities and Futures Commission (SFC) has taken a stringent new approach to virtual assets.
Virtual Asset Trading Platforms (VATPs) conducting business in Hong Kong or actively marketing to Hong Kong investors must now be licensed by Hong Kong’s SFC (Securities and Futures Commission) - irrespective of whether or not they provide trading services in security tokens. The SFC is taking a future-focused approach to developing and enhancing policies to regulate virtual assets and create a more stable environment for firms and investors dealing with virtual assets in the region.
Read more about the changes to virtual asset regulation in Hong Kong.
Firms dealing in virtual assets should approach their corporate compliance similarly to any other type of traditional assets to identify and proactively work against potential conflicts of interest.
Your systems and processes must enable the firm to identify and detect anomalies, including periodic independent reviews of suspicious price spikes. Monitoring and prevention of abusive or unethical personal trading activities is also critical. If manipulative or abusive trading strategies are discovered, your firm must take immediate steps to restrict or suspend trading activity.
Many regulators also highlight the importance of continuous professional training (CPT) for FI employees. By undertaking CPT requirements, individuals can reasonably assure investors they possess the technical knowledge, professional skills and ethical standards required to carry on virtual asset-related activities efficiently, effectively and fairly.
Our in-depth article, Addressing Compliance Within Financial Firms’ CPD Requirements, provides further insight into CPD compliance.
Regulators around the globe have placed increased scrutiny on conflicts of interest in recent years. Simply having systems in place to monitor conflicts is no longer enough.
The proper technology plays a vital role in helping your firm more efficiently manage and minimise conflicts of interest.
Review your technology and ensure it will:
MCO’s integrated compliance management suite enables firms to identify conflicts of interest more efficiently across their organisation. MCO provides a consolidated platform for compliance teams to manage areas of potential conflict, including:
For more information about how MCO’s innovative compliance management platform can help your firm effectively manage conflicts of interest, schedule your no-obligation meeting with MCO APAC Executive Tanooja Rai, or request your demo now.
Learn more about reducing your financial institution’s regulatory risk and upholding compliance with your Integrated Compliance Management Brochure.