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Table of Contents

Introduction

1. Theoretical justification of the applicability and moderating potential of the corporate culture of compliance

1.1 The concept of the corporate culture. Definitions, elemental structure and functional aspects

1.2 Corporate culture in banking and the crucial role of compliance

1.2.1 Specific features and importance of corporate culture in commercial banks

1.2.2 Significance of compliance function realization

1.3 Corporate culture of compliance. Dissemination of benefits and formation principles

1.3.1 Justification of the emergence of the culture of compliance

1.3.2 Culture of compliance as a renovated management tool in banking

1.3.3 Formation of the corporate culture of compliance in developing countries

Summary

2. Assumptions and justification of the empirical study

2.1 Research design and methodology

2.2 Analysis of the Russian banking sector. Description of the banks under investigation

Summary corporate culture commercial bank

3. Empirical analysis of the patterns of compliance management adapted in the Russian commercial banks

3.1 Conceptual understanding of the compliance function

3.2 Analytical overview of the compliance-related initiatives

3.2.1 Compliance initiatives of Raiffeisen Bank

3.2.2 Compliance initiatives of UniCredit Bank

3.2.3 Compliance initiatives of Sberbank of Russia

3.2.4 Compliance initiatives of Alfa-Bank

3.3 Organizational feature as the factors of compliance effectiveness

3.4 Discussion and practical implications

3.5 Study limitations

Summary

Conclusion

List of references

Appendix 1

Appendix 2

Appendix 3

Appendix 4

Appendix 5

Appendix 6

Appendix 7

Appendix 8

Appendix 9

Appendix 10



Introduction

Over the long period of time starting from the actual introduction of the concept of corporate culture, it has long been treated as a “soft” and somewhat irrelevant managerial tool from the perspective of the company's financial performance. However, the studies performed by Kim Cameron and Robert Quinn (2011), as well as those conducted by James Heskett and John Kotter (2008) have led the adherents of the management science to an understanding that the corporate culture of an organization, once properly cultivate, managed and supervised, can act as an apparent driver of financial performance and a distinctive competitive advantage.

Since then, the concept of the corporate culture has undergone a number of alterations and reinventions, the most substantial of which is the modern trend to address the corporate cultures of individual organizations with the respect to their idiosyncratic features and the withdrawal from the attempts to classify cultures utilizing formalized models. As a result, the recent emergence of such customized types of corporate cultures as, for instance, the culture of innovation (Satsomboon, Pruetipibultham, 2014) has raised the issue of cultivation of cultures that give the companies abilities to facilitate certain processes that constitute the greatest importance in terms of the business conduct conditions. One of the more recent concepts, the culture of compliance, has found theoretical and practical support in context of its appropriateness for the facilitation of the process of risk management in commercial banks, specifically, those that reside in the countries with corruption-prone national cultures (Albright, 2017; Ashraf et al., 2016).

The concept has proven to be effective in terms of the elimination of the conflict of interests between the employee and the compliance function which helps the financial institutions to evade crises provoked by the acceptance of corruption and secrecy shared by the employees (Naheem, 2015; Bartuli et al., 2016).

The identified theoretically supported potential of the corporate culture of compliance to facilitate the process of risk management and ensure economic stability of banking institutions has led me to question its applicability in terms of the current hazardous conditions of the Russian banking sector. With the inauguration of the new head of the Central Bank of the Russian Federation - Elvira Nabiullina - a trend for mass deprivations of commercial banks off their banking licenses has become the most distinctive feature of the Russian financial sector in the last 4 years [64]. This condition constitutes the immediate relevance and actuality of the research into the appropriateness of the corporate culture of compliance as of a universal solution for the regulatory issues the banks have to face.

Due to the absence of any studies of this kind performed in Russia, the present research is aimed at exploration of the experience of the most successful commercial banks operating in the Russian financial sector on the matter of possible mechanisms of compliance culture cultivation. The research design presupposed the deployment of 2 series of semi-structured in-depth interviews in order to gather the information and expert opinions on a number of research questions:

1) How do employees and managers of the commercial banks operating in Russia understand and interpret the notion of compliance?

2) Is there any observable evidence of the presence of the culture of compliance (in the mindset of the employees)?

3) How does the management of the banks cultivate the culture of compliance?

4) What are the “best practices” of compliance administration that managers consider as the predictors of the economic stability in terms of functioning in Russia?

Accordingly, top-tier compliance officers and entry-level employees of 4 foundational banks - 2 local and 2 foreign - operating in the Russian banking sector were chosen as the research objects. Their expert opinions on the matter of the culture of compliance and the effectiveness of compliance itself might constitute the source for the insights on the matter of applicable initiatives aiming at the assurance of compliant behavior.

In course of the study, 3 compliance officers (from Raiffeisen Bank, UniCredit Bank and Sberbank of Russia) and 9 entry level employees (2 from Sberbank, 2 from Alfa-Bank and 5 from Raiffeisen Bank) were interviewed. Based on the information gathered, it was concluded that:

1) Corporate culture of compliance as a managerial tool cannot act predictive of the economic success in terms of functioning in the Russian banking sector

2) Only one of the 4 banks subjected to analysis demonstrated the successful instillation of the values of compliance into the organizational mindset

3) Most of the compliance officers, regardless the residence location of their banks' headquarters, share the perspective that the best and, presumably, the only certain method to ensure the compliant behavior of the employees is via the means of pecuniary fines and other substantial negative sanctions

Although there is a number of limitations attributed to the present research, such as, for instance, the fact that it does not account for any immediate correlations between the formation of the culture of compliance and the performance results of the banks, it provides a perspective on the potential effectiveness and importance of the culture of compliance and some other components of the compliance jurisdiction in terms of their positive influence on the banks' resistance to severe external regulative measures. It also contains a number of practical implications for the compliance officers and other managers of the Russian banks that are likely to cast an effect on their stability in terms of the present economic and regulatory turmoil.



1. Theoretical justification of the applicability and moderating potential of the corporate culture of compliance

1.1 The concept of the corporate culture. Definitions, elemental structure and functional aspects

The notion of the corporate culture finds its place among the most widely-acknowledged concepts of the modern management science. Since its popularisation in the second half of the 20st century, the matter of corporate culture has been largely investigated with countless researches conducted to test and prove the potential of a company's culture to modulate its employee satisfaction, financial results and overall performance [72]. Nevertheless, this particular multitude of academic articles and researches creates an ambiguity around the definition of the corporate culture and its constitution. A brief historic overview of the concept is going to be given in order to ultimately define its comprising features.

The emergence of the notion of corporate culture is connected to the organizational climate framework introduced in 1962 by Andrew Halpin and Don Croft (1962). The climate of an organization comprised such features as opinions, beliefs and values transmitted across its members and shared by them. Such approach was not completely devoid of flaws as some of the criteria used to identify the type of the climate were quite vague and based on highly subjective indications. Despite this, such framework gave way to numerous researches concerning the values and principles spread across the organizations.

Such worldly renowned scholars as Edgar Schein (1985) and Allan Kennedy with Terrence Deal (2000) maintained that the corporate culture establishes a specific mindset among the employees that is supported by different daily procedures of “rituals” allowing the companies' management to implement strategies and changes more efficiently.

In terms of this paper, a more generalized yet universal definition is going to be used. Luu Trong Tuan (2012) states in his work “Behind knowledge transfer” that the most common definition of corporate culture involves a set of common values and beliefs “shaping the members' behavior and building the core identity of organisations.” This resulting “identity” is explicit to the customers and other counteragents of the company as well as to its own employees. Thus, corporate culture is interconnected with the company's strategy and public relations. Still, there is a necessity to identify the appropriate elemental structure of the corporate culture in order to determine the modulating factors and critical points.

As mentioned previously, the concept of the corporate culture was originally based on the model of organizational climate. Due to this fact, earlier publications on the matter of the structure of the corporate culture enlisted mostly subjective shared mental gestalts of the members of the organization (Cameron, Quinn, 2011; Schein, 1992). In contrast, modern scholars tend to present the culture of an organization as a product of a multitude of external and internal factors including: national culture of residence of the company, industry it operates in, technology it utilizes, etc. (Needle, 2015; Aleassa, Megdadi, 2014) In terms of this paper, the framework representing culture of an organization as a pack its vision, values, people, practices, narrative and place is to be utilized as it allows one to examine the correlations between managerial decisions concerning corporate culture and their actual implementation [81]. A brief overview of the elements identified is to be given.

1. Vision

“Vision” of an organization traditionally represents the future portrait of the company aligned with the goals postulated in the mission statement (David et al., 2014). Constituting the highest level of managerial planning, vision of the company drives its yearly, quarterly and even daily schedules.

Due to the fact that the mission statement itself tends to represent somewhat a “purpose” of the company, vision has to account for all the specific statements translated in the company (Dempsey, 2015; 81). For instance, if some IT company maintains in its mission statement that one of its global purposes is to eliminate the need for multiple computer devices, such component of corporate culture as “vision” has to form a definite mindset across all the workers of the organization claiming that all the operations and innovations cultivated in the company have to serve the purpose of integration and substitution of the devices.

Functioning as mediating instrument, vision transmits managerial perspectives directly to each and every employee of a company. Respectively, group meetings with management representatives, general company meetings and lectures act as the most appropriate mechanism of the vision distribution across the organization.

2. Values

“Values” account for specific traits of character and behavior that the company wants to instill in all of its employees (Dempsey, 2015). Such traits usually reflect general human beliefs and attitudes, such as, for instance, “generosity” or “honesty”. The crucial point is that such values have to be incorporated in the routine operations employees perform during their working days [81]. Employees have to understand the purpose, benefits and importance of the values in the economic context.

There are lots of worldly-acknowledged companies that translate their values to their customers and public in general as well as to their workers. Google, for example, postulated their famous motto “Don't be evil” in their registration statement as well as their code of conduct [75]. In spite of the fact that such postulate is quite vague and seems somewhat unrelated, Google's management makes it clear that this motto represents the fair and unprejudiced attitude towards their clients and partners. Such element of corporate culture can positively affects public trust and employee engagement.

3. Practices

“Practices” is one of the most critical components of any corporate culture as it acts as a physical evidence of the culture for most of the employees. Practices constitute consistently repeated events engaging employees in different activities. From weekly group meetings to yearly green projects, practices work as the direct instrument of the realization of vision and values of the firm.

Practices also act as mediators as they usually provide grounds for lectures and discussions of the values and culture adapted in the organization.

4. People

This element of corporate culture represents the “image of the average employee” of a company. Such image has to be translated across the organization and implemented in the workers' mindsets. That is due to the fact that such an alignment allows company's management to ensure stability and sustainability in the working collective as well as the right customer communication (Dempsey, 2015).

In case of successful instillation of the image in the working collective, values and vision of the organization might transform into workers' own beliefs, thus, ensuring more effective and compliant behavior and functioning.

5. Narrative

“Narrative” can be interpreted as the “story” of the company. Enriched with associative values and attitudes, the history of the company can act as one of the most effective mechanisms of corporate culture transmission [81].

Such element of the corporate culture is frequently used by multinational corporations occupying new markets as the narrative facilitates the process of adaptation of unfamiliar values among the foreign collective. It is crucial, however, to consider national culture peculiarities and change the narrative accordingly as some values and beliefs might seem inappropriate in certain cultural contexts.

6. Place

“Place” represents the actual location of the office and the internal characteristics of the office building. There is evidence that some major companies, for instance, Bloomberg and Google, modulate their offices in order to create a special atmosphere [81]. Nevertheless, it is quite complicated to assess the extent to which “place” influences financial results of the firm and overall employee satisfaction. That is due to the fact that the subjective perceptions of the office differs dramatically from one employee to another [72].

All the elements enumerated can modulate corporate culture and act as the instruments for the cultural management. Still, there is a need to demonstrate the importance of corporate culture and its role in overall performance of a company.

As mentioned previously, the main purpose of the corporate culture is to facilitate different processes conducted on the daily basis. However, a large body of contemporary literature suggests that the strong and appropriate corporate culture can lead to superior financial results and overall performance.

According to Albrecht Rothacher (2004), corporate culture played a significant role in the successful development of 19 major multinational corporations. Most of the companies faced global organizational changes including: mergers and acquisitions, diversification, etc. Toyota Motor Company, for instance, managed its corporate culture in context of its expansion to the USA. Similarly, Kim Cameron and Robert Quinn (2011) argue that the corporate cultures of such companies as General Electric, Nike, Toyota and etc., can be perceived as competitive advantages. These companies implemented innovations faster than their competitors and generally demonstrated higher performance indicators due to the appropriate and engaging type of culture they cultivated. Jay Barney (1991) came to similar conclusions on the matter of corporate culture. He stated that an organizational culture can act as a competitive advantage on condition that it is:

· Viable. It has to set feasible values and goals

· Rare. It has to be easily distinguishable from those of the competitors

· Imperfectly imitable in order to prevent competitors from mimicking it

There is a modern trend to investigate the direct correlation between corporate culture management and financial success. John Kotter and James Heskett maintained in their book “Corporate culture and Performance” (Kotter, 2008) that corporate culture can act as a set of instruments allowing managers to control the flow of the processes and their effectiveness via human resources management. During their research it became apparent that the companies that did not cultivate performance-enhancing cultures ended up receiving eightfold less money in net income than those that did. Summary of the financial indications are presented in the table below.

Table 1

Financial performance of companies studied during 20 year period [76]

As evident, companies can receive economic benefits by managing their corporate culture. Public trust and positive perception of the company results in higher investments and, hence, growing share price; the company gain an ability to efficiently attracts additional human resources and utilize the best skills available. Moreover, James Heskett argues that up to 50% of the difference in profits between similar companies can be explained by the effectiveness of the corporate culture [73]. Companies can utilize such colossal benefits of the corporate culture as it allows them to lower the level of employee turnover, increase the engagement of the workers and managers, cultivate the atmosphere that motivates and helps people, thus, provide grounds for the synergetic effect [79].

Corporate culture can also facilitate the implementation of performance management practices (Kotter, 2008). Indeed, a culture that sets the values of involvement and adaptability in the context of changes facilitates such processes as employee trainings, management by objectives or performance-based compensation. There is evidence that certain types of organizational culture can trigger each individual employee to perform at his best, hence, promote success of the whole organization (Shahzad et al., 2012; Awadh, 2013). Indeed, a number of studies report that there is an observable growth of employee effectiveness in the companies that cultivate strong cultures with initiatives and values translated directly by the top and middle management.

As well as being connected to the financial results of the organization, corporate culture simplifies and facilitates large-scale organizational changes. Daniel Denison (1990) suggested a multidimensional model of corporate culture that describes it by 4 criteria: Mission, Adaptability, Involvement and Consistency. The dimension of adaptability represents the ability of the company to adapt to external changes and incorporate different strategic alterations in order to meet the customer expectations. Thus, creating the culture of adaptability can help companies' management to perform successful mergers and acquisitions or to adapt to new cultural conditions in terms of international expansions. In such situations the company's management has to make a decision whether it would be beneficial to implement the culture of the maternal company into the acquired ones or to adapt the culture based on the historical experience the two companies had [79]. The need to align corporate cultures is explicit as cultural differences might result in destructive processes and undermining behavior from both organizations. Companies with highly adaptable cultural types will likely cut the costs on the reeducation and additional trainings of the staff.

A recent case of the Lenovo company performing a double M&A displays the importance of the corporate culture alignment. In 2014 Lenovo, a Chinese international IT corporation performed 2 consecutive acquisitions of the IBM's server division and Motorola's mobile phone division [74]. Lenovo's management made a decision to create a new reward assessment and reward system that would be universal across the whole organizations. It also involved international experts on the board of directors to ensure cultural stability. This resulted in the dramatic increase on the company's share prices as well as the pool of potential investors. The company constructed a new corporate culture in order to make it fully operational across all the new division and, thus, facilitated the process of the adaptation of new businesses.

Despite the appearance of a large variety of classification models of corporate culture, there is a modern tendency to identify some idiosyncratic types of culture across different groups of organizations. As mentioned previously, corporate culture is to some extent the product of external influence coming from the peculiarities of the industry the company operates in, the local culture or customers and even the company's vision or mission. Some industries drive the companies to cultivate cultures that best suit the main purpose of the operations to ensure maximizing of the performance potential.

One of the most explicit examples of such cultures is the knowledge culture that is being cultivated across the majority of modern universities (Martins, Terblanche, 2003; Claver E. et al., 1998)) Such culture transmitted and adapted among the students and the professors ensures not only the desire to study, but also the scientific potential for the innovative researches as students and professors communicate with each other and frequently form research associations. Another example is the culture of innovation that is usually maintained in the IT companies (Satsomboon, Pruetipibultham, 2014). Such culture promotes innovations and creative behavior on all the organizational levels by instilling the values of creativity and incorporating continuous practices of group discussions.

One of the most common reasons for the creation of such idiosyncratic types of corporate culture is the need to mitigate industry-specific risks and risks immediately connected with the human factor in particular. The two main sources of risks connected to the corporate culture are:

· The human factor that triggers all sorts of operational risks connected to the daily operations

· Risk culture, specifically, loose management of this culture that results in dangerously high level of risk tolerance across the company's employees and management

In 2016 a survey was conducted that identified the interdependencies between the type and features of the corporate cultures in construction companies and operational delays coming from a number of different sources they have to face (Arditi et al., 2017). The hypotheses were connected to the fact that in corporate cultures of the clan type information flows and communications with partners are efficient due to the ultimately determined roles and vertical organizational structure (Cameron, Quinn, 2011). Indeed, the researchers came to conclusion that in construction companies that deploy the clan culture operational delays are minimized. Hence, the correlation between operational risk minimization and corporate culture management was identified.

The unstable risk cultures, however, challenge managers in a much more holistic fashion. Risk culture stands for the general attitude, appraisal and acceptance of risk that is maintained in the organization (Whitham et al., 2016). Companies whose profits are associated with the exposure they accept tend to cultivate risk cultures on purpose as it ensures their economic success. Such companies usually operate in industries connected to sports, entrepreneurship or financial operation.

These companies tend to incorporate such procedures as result-based rewarding, competitive rewarding or even transmitting values of aggressiveness and rivalry. As a result, employees are being exposed to continuous assessment and valuation and perceive a higher-than-normal level of stress (Fritz-Morgenthal et al., 2016).

If not managed, risk cultures become hazardous to the employees and the organization as a whole as the constant risk exposure makes them vulnerable in terms of external regulations and governance. Hence, there is a necessity to create certain types of corporate culture and incorporate risk management mechanisms for the companies operating in risk-associated environment.

SUMMARY: A consistently managed corporate culture can be beneficial in terms of financial results as well as the overall firm performance in the long run. Additionally, it allows company's management to ensure success during radical organizational changes. Finally, companies that operate in risky environment have to cultivate idiosyncratic types of culture in order to manage their risk exposure form both internal and external factors.

1.2 Corporate culture in banking and the crucial role of compliance

Financial institutions and banks in particular constitute a rather outstanding group of companies from the perspective of risk exposure. As mentioned previously, the level of income of such organizations is directly connected to the risk they accept on the daily basis. Hence, a specific type of culture is needed to be implemented in order to minimize the exposure.

In terms of this paper, the area of interest is narrowed to the commercial banks solely. There are two main justification points for such framing:

1. Such institutions as, for instance, investment banks are being exposed to even higher risk levels than general commercial banks due to the fact, that the theory of investments and financial management suggests that higher risk provides higher returns (Saksonova, Savina, 2016). Nevertheless, this inevitable penchant for risk exposure leads to complexity of the risk acceptance model. Thus, all such organizations tend to cultivate the risk culture; any alteration of such cultures might lead to their financial instability.

2. Commercial banks are crucial for the countries they operate in and for society in general as they function as the mediating agent between different fractions in need of money transfers (Saksonova, Savina, 2016). Hence, commercial banks are constantly exposed to external regulations and communications with governing authorities. Such exposure influences both their business activities as well as their culture and daily routines (Liu, 2016).

To properly disseminate the importance of corporate culture in such institutions and the role of external regulators, it would be worthwhile to give an overview of the banks themselves and their operations.

Commercial banks are licenced financial institutions that provide credit- and investment-based services to either individuals or corporate clients [86]. The total amount of credits that commercial banks are giving to their clients are counted as the banks' assets. In contrast, if the bank accepts money for depositary purposes, it increases the liabilities of the bank.

As mentioned previously, successful and riskless functioning of commercial banks is critical for society. That is due to the fact, that an overwhelmingly large proportion of population have savings accounts and deposits in different banks worldwide. In United States, for example, almost 90% of population are banked [83]. Thus, in a situation when a commercial bank is losing its license or going bankrupt, a large group of people loses their money.

Exposure to external regulators and other financial risks results in the formation of two peculiarities of banks' business conduct - an individual type of corporate culture and the emergence of the compliance department as a significant part of the organizational structure.

1.2.1 Specific features and importance of corporate culture in commercial banks

As for the overwhelming majority of commercial organizations, corporate culture in banks affects their performance indicators and financial results (Mousavi et al., 2015; Thakor, 2016). It is possible to identify at least three main factors that affect corporate culture in commercial banks and lead to its peculiar formation. Such factors include: crucial influence of culture on sales, corporate culture deployment for operational risk mitigation and the connection between the corporate culture and public trust.

1. Corporate culture and sales

Sales in banking are directly connected to the individual results of the front-office employees. Thus, there is a tendency to create the culture that encourages competitiveness, aggressiveness and capitalistic achievements (Liu, 2016). Managers frequently discuss results with employees, sometimes in quite stressful manner, as they see it as a motivational instrument.

As a result of such practices, many banks are facing the problem of cultivation of the culture of corruption (Liu, 2016). Culture of corruption in banking is associated with fraud. Fraud in the banking context is an intentional falsification of the transactions and reports usually performed in order to meet the budget requirements [85]. Fraud is perceived by the employees as a way to cope with the requirements and management style.

As long as individual fraud in small amounts is not hazardous in the business context, culture of corruption initiates frequent and ubiquitous fraud that results in the holistic nature of opportunistic behavior.

For that reason, management of most of the commercial banks decides in favor of constant verification and less violent motivational tactics.

2. Corporate culture and public trust

Public trust is a very significant factor in the context of banking as a bank with a unreliable reputation would have issues attracting new clients and, thus, will lose the ability to create added value. Due to the fact that almost all of the commercial banks provide quite similar services, a flawless reputation might act as a critical competitive advantage.

According to Anjan Thakor (2016), corporate culture of a commercial banks can cause a dramatic influence on its reputation and public trust. That is largely justified by the fact that banks have to publish all their balance statements, financial statements and, most importantly, they are constantly exposed to obligatory external audit. Any reported misconduct would cause reputational damage, thus, banks strive to cultivate culture with efficient controlling mechanism preventing them from public mistrust.

3. Corporate culture and operational risks

Operational risks are commonly associated with the human factor. Each individual employee can cast a significant impact on the bank's financial stability as all the misconducts and unlawful transactions would eventually be exposed to the auditors and, in the worst case, reported officially.

For that reason, banks cultivate cultures with an inbound oriented controlling mechanisms and instillations associated with legal issues and rules of operational banking. Such initiatives are usually realized with the help of lectures provided by the management of the bank and repetitive meetings with the group leaders (Thakor, 2016).

The resulting prototype of the corporate culture developed in commercial banks appears to be of a highly controlling type according to Anjan Thakor [88]. In his study he utilized the means of the competitive values framework that identify typical values of corporate cultures as: controlling, competing, creative and collaborative. Companies that cultivate highly controlling corporate cultures tend to hinder employees' creative abilities in order to eliminate possible operational risks. As a result, companies with such cultures accept lower incomes due to the high amounts of transactions being banned but ultimately realize the strategy of risk minimization.

Controlling culture in banks also dictates the usage of specific culture management procedures. As mentioned previously, the overwhelming majority of banks utilize mandatory meetings and discussions with somewhat assertive analysis of financial results and budget completion. In contrast, a number of empirical researches (Nhamo J. et al., 2017; 93) suggest that the three main tools for successful cultural alteration in financial institutions are: positivity, dialogue and diversity.

Indeed, direct communication with employees, enforcement of positivity and amnesty of whistleblowing and reporting and diversified cultural experience might be the key for modulation of the underlying, latent cultural gestalts of the bank's staff. Despite this, commercial banks tend to rely solely on the organizational components of such control, specifically, the compliance department.

1.2.2 Significance of compliance function realization

External regulation of the commercial banks is usually performed by central banks of the countries they operate in or other governmental authorities. The areas of regulation are:

· Prudential regulations or capital requirements ensuring stability and safety of depositors

· Systematic risk reduction in order to minimize the probability of major economic crises associated with unfair banking

· Confidentiality of the personal data banks gather from theit clients

· Fighting money laundering and financing of terrorism

Although all the banks are exposed to obligatory audit and regulatory checks, certain major economic downfalls associated with bad banking triggered the introduction of a specific function realized by means of internal banking departments - the compliance function.

According to Basel Committee on Banking Supervision (Basel Committee, 2005), compliance as a function consists of interpretation of the regulatory requirements, analysis of bank's operations and individual transactions on the matter of correspondence with laws and overall ensuring of conformity of bank's internal policies.

Compliance controls all the individual transactions from the sales department, analyses all the confidential documents, supervises accesses to private data and provides ruling for all the unconventional situations including gifting colleagues or supervisors and participating in business meetings outside the office. All these functions ensure absence of money laundering among the bank's operations and any signs of corruption that employees might commit during their daily routines.

The emergence of the compliance function and its realization through organized departments was the initiative of the Basel Committee. The committee itself was created as a countermeasure to a series of major economic downfalls of the 20st century.

The Wall Street Crash of 1929 that resulted in the Great American Depression was one of a series of major incidents triggered by unfair or uncontrolled banking and, specifically, brokerage [80]. At that time, the stock exchange was loosely regulated and all the major players consisted mainly of American investment banks had an opportunity to fill the market with free money on behalf of their clients. As a result, the stock prices of the major companies were inadequately overvalued and the subsequent downfall of some of the most crucial industrial corporations leaded to a long period of unemployment, financial instability and social anomy.

The devastating effect of uncontrollable actions of major financial institutions made the necessity for the creation of a universal controlling initiative apparent. Thus, in 1974 the Basel Committee on Banking Supervision was created by the group of 10 countries that included: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom and the USA. The Basel Committee provided universal recommendations on the business conduct in investment institutions and commercial banks that included:

· A number of indexes that allow regulators to assess the ability of banks to pay the deposits back. Such indexes included different coverage ratios and now act as benchmarks for regulatory requirements in most of the countries worldwide (Kashyap et al., 2004; Hдrle et al., 2010).

· Definitions, normative prescriptions and standards of fighting corruption, money laundering and fraud in commercial banks

· General recommendations concerning the organizational aspects of functioning and means by which bank's authorities can influence employees and ensure compliant behavior (Basel committee, 2005)

Compliance department as an organizational entity is now an obligatory requirement for all of the financial institutions. Of the standards identified, compliance department concentrates mostly on the money laundering, transactions and general behavior of the employees (Naheem, 2015). The anti-money laundering (AML) compliance transmits the information about practices and schemes of money laundering across all the organization and secures the transactions made by the sales employees. This part of the compliance jurisdictions appears to be one of the most critical elements of risk-management due to the fact that all the sanctions introduced against commercial banks on the matter of the money laundering would inevitably list to public mistrust and other reputational damages. Any large-scale commercial bank charged with illegal operations appears as untrustworthy and hazardous from the perspective of potential depositors. General compliance officers mostly provide regulations on the accesses to confidential information and other data.

As can be seen, compliance department has to integrate the roles of an informatory and an enforcer of the rules and standards presented by the outbound authorities. The means of the realization of such functions traditionally include tests and trainings oriented for the newcomers or the annual events dedicated to lectures on the matter of compliance and risks. The essence of these activities is the fact that compliance departments have to communicate with the regulators and interpret their requirements. Thus, compliance department works as a mediator between the bank itself and the external authorities.

Although such activities might seem somewhat irrelevant in the business context as they mostly cut the incomes rather than stimulate them [94], the matter of compliance seems to attract more and more interest from the banks' management as well as the regulators themselves.

One of the reasons for that is the fact that non-compliant behavior of individual employees and organizations as a whole result in colossal fines and dramatic reputational damages [89]. The appendix 4 represents amounts of money companies lost in recent years for the compliance-related reasons (Appendix 4). As can be seen, the estimated amount of money paid in fines by the commercial banks since 2008 exceeds 204 billion dollars.

It should also be mentioned that non-compliant behavior influences companies that do not necessarily operate in finance or banking. For instance, in 2015 a multinational car manufacturer Volkswagen was obliged to pay 18 billion dollars in fines due to their cheating on the test of emission releases [84]. This case illustrates the fact that the acceptance of opportunistic behavior on the lower organizational levels ultimately leads to the holistic nature of non-compliance across the organization.

The second reason for the growing interest towards compliance in the banking sector is associated with the global financial crisis of 2008. The biggest and most devastating economic downfall since the great depression, this crisis made public question the appropriateness of the current regulatory policies of the legal authorities [94]. This leaded to the emergence of the new regulatory requirements and policies and triggered the reinvention of some of the principles of compliance in banking.

One of such reinventions altered the general attitude towards the compliance department and compliance function in the banking sector. The mediatory role of compliance unsurprisingly created somewhat a contradiction in banks as to the fact that a large group of the bank employees were being compensated on the bases of their sales indexes. Considering the fact that the main purpose of the internal compliance regulation was to eliminate potentially hazardous deals and transactions, these interactions provoked the conflict of interests between the sales department and the compliance department (Melwani, 2014). After the 2008 crisis compliance departments started a large number of initiatives concerning the role of compliance in the bank and the actual result of their actions. It can also be mentioned that the Basel Committee issued several high-level papers on the matter of culture in banks and proposed a set of mechanisms that would have helped managers integrate the compliance function more efficiently (Basel committee, 2005).

Another major modulation included the alteration of the rewarding mechanisms of the sales persons (Melwani, 2014). Sales staff in the banks directly communicate with their clients and, thus, possess a great potential of fraud utilization or corruptive behavior. As mentioned previously, the main factor that leaded to such behavior and acted in favor of the culture of corruption was the rewarding system based solely on the budgeted results. The new rewarding mechanisms incorporated such ratios as the risk-adjusted profits and risk-coverage ratios to identify the sales associated with reliable counteragents (Melwani, 2014). Thus, the management of commercial banks decreased the fraud- and corruption potential while sticking with the motivational system working in favor of achievements.



1.3 Corporate culture of compliance. Dissemination of benefits and formation principles.

1.3.1 Justification of the emergence of the culture of compliance

As mentioned previously, the world crises triggered by the unfair and unlawful banking practices initiated the process of the renovation of the compliance function principles. Despite this, the changes implemented mostly concerned the appropriate indications of risk coverage and capital ratios (Bougatef, Mgadmi, 2016). However, the analysis of a number of recent downfalls of commercial banks signifies the necessity for a reengineered approach to compliance and risk management. The solution for the underlying issues of financials institutions can be found in the specific cultural type of organizations that was recently discovered and implemented by a large variety of companies - the culture of compliance.

Culture of compliance refers to a multidimensional cultural model of an organization implying adaptation of the principles of integrity, transparency and compliance at the individual level of each employee and the ultimate alteration of the risk culture commercial banks cultivate currently (Verhezen, 2010). In spite of the fact that the emergence of the notion “culture of compliance” is a rather recent one, the importance and effectiveness of the implementation of such culture in terms of the risk mitigation in banks has already been registered by a number of researchers and organizations [92, 89, Orem, 2016]. In order to fully realize the benefits that a culture of compliance can bring to financial institutions, one should consider several recent crises in banks that do associate with their cultural types.

Firstly, it is worthwhile to analyse the 2015 case of HSBC, a British multinational banking holding. In 2015 a scandal occurred around the Swiss branch of the holding as an insider whistleblower Hervи Falciani revealed information about secret bank accounts maintained by the private banking division for the arms smugglers, politicians, criminals and tax dodgers that were trying to lauder illegally acquired incomes (Naheem, 2015; 95). Presented firstly as a mistake and a grand downfall of the AML compliance of the bank, journalists managed to identify that a large proportion of the HSBC's staff were actually aware of the fact that the named accounts were connected to illegal operations [95, 96]. As such, the ICIJ found out that employees responsible for the actual transactions and communication with the clients trying to decriminalize money were part of the middle management of the bank (Naheem, 2015). This, undoubtedly, hindered the probability of the official reporting of the incidents to the compliance department as managers could simply fire the whistleblower.

As can be easily seen, this case identifies the acceptance of the non-compliant behavior at the corporate level. The employees of the bank were informed of the risks associated with money laundering and tax avoidance and still did not report the actions of the managers. This type of behavior can be explained by the previously described phenomenon of the culture of corruption. It is commonly accepted that the norms and standards of the organizational behavior are being instilled through indicative examples of the supervisors and managers [Liu, 2016; 91, 89]. Hence, in the Swiss branch of the HSBC holding the non-compliant behavior of the middle management provoked the distribution of the acceptance of illegality among all the employees, thus, leading to the culture of corruption.

The second case is the 2008 LIBOR scandal that implied cooperative manipulation of the LIBOR rate by a number of major international banks including Barclays bank, the Royal banks of Scotland, UBSm the Lloyds bank and Deutsche Bank. The London Interbank Offered Rate or LIBOR is the rate at which financial institutions in different countries lend money to each other [87]. This rate affects such economic indicators as the minimal credit rates, educational credit rates and the returns of American governmental bonds. The rate is calculated on the basis of reports made by the banks on the matter of rates at which they are willing to lend money.

A continuous manipulation of the rates by a cartel consisting of the major multinational banks resulted in the 2012 official investigation into the matter of conspiracy. As it was identified during the investigation, the process of the rate manipulation was started by o group of top managers at the named banks and was not reported by their subordinates [87]. As in the previous analyzed case, the illegal actions were not detected by the compliance departments due to the fact that they were effectively initiated by the management of the firm, hence, did not correspond with the jurisdiction of the compliance.

The final case is the 2016 scandal concerning the secret opening of approximately 2 million fake accounts in Wells Fargo. Wells Fargo is an American international banking holding that provides services to corporate and individual clients. In 2016 it was revealed that the management of the bank had fired more than 5,300 employees over the 5 year period because of the creation of fake accounts by the sales staff in order to get the bonus reward (Brown et al, 2017). The bank was charged with fines for the massive fraud, although the management of the organization blamed low-level employees for the non-compliant actions.

The crisis in Wells Fargo can be explained by the two main factors - whistleblowing-intolerant corporate culture and budget-oriented remuneration policies (Brown et al, 2017). The employees of the organization stated that they did not report the incidents of the peer colleagues due to the fact that firings of whistleblowers in Wells Fargo was considered normal. A contradiction to the statements of the corporate documents, such firings resulted in the instillation of the “silence” principle; the employees were afraid to speak up, thus, the compliance department lost an opportunity to identify fraud on the entry level.

The bank also utilized the policy of the sales staff remuneration with a big bonus part that triggered the process of systematic fraud in order to meet the inadequately high requirements. With time, such practices were integrated into the culture of the organization at the lower levels and were considered acceptable among the sales persons (Brown et al, 2017).

Considering the underlying triggers of non-compliant behavior in the banks mentioned in case studies, it is possible to make several conclusions:

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