I recently spoke in Kuala Lumpur, Malaysia at a high-level conference on financial stability and supervision attended by top executives from the central banks of nineteen countries. The conference was sponsored by The South East Asian Central Banks (SEACEN) Research and Training Centre, based in Kuala Lumpur.
SEACEN was established as a legal entity in 1982 with eight member Central Banks and has since grown to twenty Member Central Banks/Monetary Authorities. SEACEN stakeholders also include Associate and Observer Central Banks from an additional fifteen countries. The SEACEN sphere of coverage now extends far beyond South East Asia, taking in countries as far west as Afghanistan and as far east as Fiji.
Just as the Federal Reserve is the Central Bank of the United States, with responsibilities including monetary policy and bank supervision, SEACEN Central Banks have similar responsibilities. And SEACEN central bank programs also promote a better understanding of the financial, monetary, banking and economic development matters which are of specific interest to the countries in South East Asia or to the region as a whole.
The conference participants, who included the key executives of the Central Banks over financial stability and/or supervision, were interested in learning about the issues that led to the U.S. financial crisis of 2008 so they could possibly avoid any similar issues and prevent the magnitude of what happened in the U.S. from occurring in their own countries.
When the banking industry in any country gets into trouble it usually leads to a financial crisis which, as we know, damages that country’s economy. To have the privilege of talking with this esteemed group of executives about the misbehavior and widespread fraud that led to the most recent crisis in the United States so they can identify and possibly curtail such banking fraud and thus prevent a financial crisis in their own countries, was indeed an honor. I wish our own Federal Reserve System had been as prescient and heeded the many warnings given to them before the crisis.
I discussed whistleblowing and ethics and the specific type of fraud which was rampant during the financial crisis and is still present. That type of fraud is called “Accounting Control Fraud.” I identified examples of that fraudulent behavior which occurred when I was at Citigroup, noting that reports from other whistleblowers also reveal that accounting control fraud behavior existed in most of our other large banks, including Wells Fargo, Countrywide/BofA, and J.P. Morgan Chase.
Accounting Control Fraud is where the management controlling a bank establishes very strict goals which must be met, and drives these goals and incentives down through the company to all employees, thus creating a “make the numbers” corporate culture. Thus the employees are incented to do whatever it takes to achieve the goals.
Accounting Control Fraud (ACF) behavior was originally defined by George Akerlof, an economist and Nobel Laureate who studied the 1980’s banking and S&L crisis and identified this type of fraud that was epidemic in the 80’s and caused the crisis. His writings with Paul Romer on the issue first identified these specific fraud dynamics.
My Bank Whistleblowers United colleague, William K. Black, published The Best Way to Rob a Bank Is to Own One, which not only described his experience and observations as a key government prosecutor during the 1980’s crisis but also further analyzed the accounting control fraud dynamics causing that crisis. In the book’s second edition, published in 2013, Bill expanded his analyses showing that bank Accounting Control Fraud behavior was also the key contributing factor to the most recent 2008 financial crisis.
In several days of meetings, from a keynote presentation to a panel discussion and an additional webinar streamed to all of the Central Banks, I discussed my experiences and Accounting Control Fraud signs so that all of their bank regulatory supervisory personnel and the key executives present could be sensitive to this type of fraud, better understand it and hopefully prevent it from happening in their own banks.
I commend SEACEN for taking time in its conferences to help its Central Banks better understand what happened in US banking such that perhaps they might not make the same “mistakes” we have. I commend them for their ethics in assuring they stay financially stable and truly follow their objectives and mission. This was an experience I will not forget and will use as an example to those in our country who have not held themselves to as high a standard.
Thank you SEACEN for the opportunity.
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
