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Learning Course Information about Ethics in Finance

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A case study on the ethics of finance 

JP Morgan Chase: 

Code of Ethics and Revisions Since the 2008 Financial Crisis


Date: September 10th, 2015 by Kara in Case Studies

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By: Daniel Strong

JPMorgan has an extensiveCode of Ethics, which appears to be well polished, written and executed. There are adequate policies designed to encourage compliance and whilst changes have only occurred to the Code of Conduct, they have been very positive in nature. Despite this, there appears to be no change in the frequency of ethical issues facing the company which suggests different types of intervention are needed.

There are three parts to this article. The first outlines relevant background information of JPMorgan, including its ongoing ethical and legal violations. The second section examines the current code of ethics adopted by the company, consisting of a Code of Conduct, a Code of Ethics and more restrictive codes for certain subsidiaries. While the codes have a distinct concern about the company’s reputation and legal compliance, they cover a wide variety of topics including human rights, the giving of gifts and intellectual property. This section also compares the current code of ethics to previous versions, noting one major change in the Code of Conduct in 2013. The third and final section explores how the code is implemented in practice and how compliance is encouraged including membership of certain organisations, the availability of reporting services and auditing measures.


Section I – Background Information

Headed by Chief Executive Officer (CEO) Jamie Dimon, American based JPMorgan Chase & Co., was founded in 1799 by its predecessor company the Manhattan Company. It was the first billion dollar corporation in 1901 and has steadily grown over time, merging with and acquiring other companies including the Chase Manhattan Corporation, which is now included in the corporation’s name. The company is primarily concerned with finance related activities, including commercial banking, market services and investment banking (JPMorgan Chase & Co 2015a; JPMorgan Chase & Co 2015b)

The bank is one the largest companies in the world, ranked as the fourth largest public company by Forbes (Forbes 2014), and ranked thirteenth and fifty seventh in the Fortune 500 and Fortune Global 500 respectively. It owns around 2.4 trillion dollars’ worth of assets, making it comparable with some of the biggest banks in the world (Fortune 2014a; Fortune 2014b; Fortune 2015).

 

Banks by Assets

Figure 1: Forbes 2014

JP Morgan’s net income and revenue were 21.8 billion and 97.9 billion U.S dollars respectively in 2014 (JPMorgan Chase & Co 2014a). To put this in perspective, the New Zealand government received and spent 89.4 billion and 92.2 billion New Zealand Dollars respectively in the same year (Treasury 2014). In US dollars this comes to about 67 and 69 billion U.S. dollars.

Possessing the kind of cash flows comparable to a modern state like New Zealand highlights the size of the corporation itself and the global economic influence JP Morgan is capable of wielding. Considering this, it is highly relevant how the company acts from an ethical standpoint.


Recent Ethical Issues

JPMorgan Chase & Co has been repeatedly involved in illegal and unethical behaviour since the global financial crisis of 2008 with no signs of remission. Some of these instances (but by no means all) are listed below.

  • February 2015: 
  • Two JPMorgan Chase & Co employees are charged for assisting an ‘aggravated breach of trust’ in selling risky products to the German city of Pforzheim and allegedly misleading the city council over the matter (Matussek 2014).

  • January 2015: 
  • JPMorgan Chase & Co along with Wells Fargo is charged by the Consumer Financial Protection Bureau and the Maryland Attorney General with running an ‘illegal marketing-services-kickback scheme’. Customers of the bank are being manipulated into using one particular company by at least six employees who were rewarded with cash and other assets for doing so. The penalties for this could cost the company $600,000 U.S. dollars (Consumer Financial Protection Bureau 2015).

  • November 2014: 
  • The Company, along with the Royal Bank of Scotland, HSBC Bank, Citibank and UBS are collectively fined £2.6 billion pounds for rigging foreign exchange markets described as part of a ‘free for all culture’ (Treanor 2014).

  • July 2014: 
  • JPMorgan Chase & Co is fined $650,000 dollars for ‘repeatedly submitting inaccurate Large Trade Reports’ by the Commodity Futures Trading Commission (Commodity Futures Trading Commission 2014).

  • October 2013: 
  • The Company is ordered to pay a $100 million dollar penalty by the Commodity Futures Trading Commission for ‘manipulative conduct’ in dumping large amounts of credit default swaps (Commodity Futures Trading Commission 2013).

  • September 2013: 
  • The Securities and Exchange Commission fines JPMorgan Chase & Co $920 million for ‘misstating financial results’ and failing to implement controls to prevent their ‘traders from fraudulently overvaluing investments to conceal hundreds of millions of dollars in trading losses’ (U.S. Securities and Exchange Commission 2013)

  • August 2013: 
  • JPMorgan Chase & Co is ordered to pay $23 million dollars for the misuse of customer funds in buying Lehman Brothers notes in ‘reducing its own exposure’ despite having knowledge of company’s problems which preceded its bankruptcy (Stempel 2013). This after being fined an additional $20 million dollars earlier in April 2012 by the Commodity Futures Trading Commission for the same case (Commodity Futures Trading Commission 2012a).

  • September 2012: 
  • JPMorgan Chase & Co is fined $600,000 dollars for exceeding speculative position limits trading on the InterContinental Exchange U.S (Commodity Futures Trading Commission 2012c).

  • March 2012: 
  • JPMorgan Chase & Co is fined $140,000 dollars for a non-competitive and ‘fictitious’ ‘prearranged trade’ where a customer was allowed to trade on both sides of a transaction (Commodity Futures Trading Commission 2012b).

  • July 2011: 
  • The Company is fined a total of $228 million for ‘rigging at least 93 municipal bond reinvestment transactions in 31 states’. This was achieved by illegally arranging to gain information on competitor’s positions (U.S. Securities and Exchange Commission 2011).

  • November 2009: 
  • The Securities and Exchange Commission penalises the Company a combined total of $722 million dollars for conducting an ‘unlawful payment scheme’ where Jefferson County (Alabama) officials were paid in order to ‘win business and earn fees’ with the cost of the illegal payments passed onto the county in higher interest rates (U.S. Securities and Exchange Commission 2009).

  • September 2009: 
  • The Company is fined $300,000 dollars for drawing upon customer funds breaching the separation of customer and firm funds, as well as failing to report this breach in a ‘timely’ manner (Commodity Futures Trading Commission 2009). 


Section II – The Written Code

What can be considered JPMorgan Chase & Co.’s code of ethics contains both an employee Code of Conduct and an accompanying Code of Ethics. There are also further Codes of Ethics prescribed to particular subsidiaries.


Code of Conduct

The Code of Conduct as of writing, is reasonably lengthy (49 pages) and covers the variety of topics with a noticeable degree of detail. The code is broken into five sections entitled ‘Our Heritage’, ‘A Shared Responsibility to Our Customers and the Marketplace’, ‘A Shared Responsibility to Our Company and Shareholders’, ‘A Shared Responsibility to Each Other’ and ‘A Shared Responsibility to Our Neighbourhoods and Communities’ (JPMorgan Chase & Co 2014).

The first section ‘Our Heritage’ is a general introduction to the code, telling employees to ‘conduct business ethically and in compliance with the law everywhere we operate’ including co-operation with authorities, with the law to be upheld according to its ‘letter’ as well as its ‘spirit and intent’ (with employees expected to know all laws and regulations affecting them). The reach of the code itself is firmly established as a ‘term and condition of employment’ of all employees of the company, although there is a slightly ambiguous exception to any ‘separate legal entity’ which must first be approved as subject to the code. Employees are not only required to follow the code, but also report any others suspected of breaking it (JPMorgan Chase & Co 2014b: 2-9).

This section also sets out rules surrounding the use and dissemination of information. All information, both personal and company-related in nature is to be considered confidential and disclosed on a ‘need-to-know basis’. This includes disclosing information to family and friends, other parts of the company (with some exceptions) and information on previous employers (which should not be revealed to the company) (JPMorgan Chase & Co 2014b: 5-7).

The second section, ‘A Shared Responsibility to Our Customers and the Marketplace’ primarily deals with legal compliance. Relating to insider trading, It contains strict guidelines on the control of Material Non-Public Information (MNPI), with employees banned from trading in any accounts when they possess related MNPI and barred from passing this information along to anybody in any form unless with explicit approval. Furthermore, it restricts employees’ private trading activities from being ‘short term or speculative’, risky or outside an employee’s ‘financial means’ (JPMorgan Chase & Co 2014b: 11-13). Employees are also restricted from investing in clients or suppliers of the company, and must disclose companies they do hold securities in, if asked to conduct any business with them (JPMorgan Chase & Co 2014b: 14).

This focus on adherence to the law continues with employees required to comply with anti-tying laws, avoid and report any money-laundering activity, and to comply with economic sanctions placed by the United States and its allies as well as anti-boycott laws. With a company ‘commitment’ to antitrust laws employees cannot fix prices, conduct bid rigging or group boycotts, separate customers or territories or limit services to particular areas (JPMorgan Chase & Co 2014b: 15-16).

The offer or acceptance of bribes is also forbidden ‘if it is intended or appears intended to obtain some improper business advantage’ including bribes that are considered common in some countries to ‘expedite performance’. Third parties also are not to be asked to conduct any governmental or business dealings on behalf of the company (JPMorgan Chase & Co 2014b: 17).

The third section, ‘A Shared Responsibility to Our Company and Shareholders’ adds further limits on employee actions. It outlines the company’s policies on intellectual copyright, such that any business-related ideas ‘created in or outside work belongs to the company’ and employees must assist the company in enforcing this ownership (JPMorgan Chase & Co 2014b: 21).

Employees also are expected to handle information responsibly, with a particular focus on ‘accurate record keeping’, involving personal expenses etc. Employees must provide ‘complete, accurate, timely and understandable’ information to authorities and not ‘misrepresent or omit material facts’ (JPMorgan Chase & Co 2014b: 21-22).

The giving and receiving of gifts is given a lot of attention, with strict guidelines likely related to anti-bribery concerns. Gifts cannot be solicited in appreciation for good service or thanks or ‘as a tool to influence or reward’. Gifts must have some sort of ‘customary justification’ such as a weddings, or stationary with company advertising on it. If goods are perishable they must not be extravagant and must be shared with colleagues. Goods over the value of 100 U.S. dollars are not to be accepted. Some types of gifts are also explicitly prohibited such as straight cash or gift cards (JPMorgan Chase & Co 2014b: 26-28).

There are also some expected policies against romantic relationships, working with relatives, engaging in business transactions with families and friends as well as using company resources to access inappropriate material, gamble, install risky software etc. (JPMorgan Chase & Co 2014b: 20).

Previous limitations on personal finance are extended with the expectation employees conduct this activity with ‘responsibility’ and ‘integrity’. This includes acting as a guarantor for clients, customers or co-workers, avoiding any preferential treatment, acting as a personal fiduciary for anyone not family or a close friend, involvement with competitors, and the use of disreputable sources of loans (JPMorgan Chase & Co 2014b: 22-24). Employee lives are also addressed with restrictions on anything that could be regarded as a conflict of interest, representing the company unless ‘explicitly authorized’, putting not for profit activities ahead of their job, ensuring social media usage does not reflect on the company as well as a ‘pre-clearance’ requirement for public testimony, talking about their jobs, and speaking engagements (JPMorgan Chase & Co 2014b: 24; 28-30). This is on top of the requirement in the second section of the code that employees cannot encourage anyone to leave the company (JPMorgan Chase & Co 2014b: 15).

The fourth section, ‘A Shared Responsibility to Each Other’ continues the theme of restrictions on employee’s behaviour. Unsurprisingly it outlines zero tolerance for discrimination, the use of drugs or alcohol at work, bullying, violence and sexual harassment (JPMorgan Chase & Co 2014b: 33-35).

The final section ‘A Shared Responsibility to Our Neighbourhoods and Communities’, rather predictably governs employee behaviour in the community. A clear line is drawn regarding the company’s political involvement, with employees allowed to be politically involved but completely separate these activities from the company. Activities such as meetings with government officials need to be pre-approved (JPMorgan Chase & Co 2014b: 37-38). Although charitable work is not to interfere with their jobs, employees are encouraged to be involved in helping the community and being a ‘global citizen’, with the company expressing support for ‘environmental stewardship’ and human rights (JPMorgan Chase & Co 2014b: 38-40).


Focus of the Code of Conduct

The code itself seems to be based on two primary concerns: compliance with the law and the upholding of the company’s reputation. The first is demonstrated for instance, by the mention of antitrust laws, accurate record keeping and so forth. The second is underlined in a slightly more implicit manner, but still visible (particularly in the restrictions of employee’s behaviour). The clearest example of this is in the introductory letter from the company CEO Jamie Dimon. He mentions how employees should act with integrity not only because it is the moral thing to do but also because ‘it is essential to protecting our firm’s reputation’ reminding readers that ‘once a company’s reputation is harmed, the effects are enduring’ and that even ‘a perceived ethical transgression can permanently damage any company’ (JPMorgan 2014b: II)

Whilst the latter of these two concerns has little to do with ethics, it is an understandable position from a business perspective, although it does seem to be excessively stressed throughout the code. One does wonders whether this concern (and its strict requirements on employee behaviour) is driven by a negative public perception of financial institutions (and its knock-on effects on investors) in the wake of the global financial crisis and recent public relations disasters mentioned previously.

The first concern, adherence to the law, is a relevant ethical imperative, but it seems unwise to consider the law the ultimate judge of what is moral. In that case, what does the code have to say about ethics beyond the company’s legal requirements?

We can immediately discount ethical requirements of the code such as discrimination or bribery because although they are certainly morally justified, they are also required by law and do not give an unfiltered insight into the ethical commitment of JPMorgan.

However, some specific rules and interests could be considered ethical. Bans on some forms of bullying and activity at work that may not fall within the law, the promotion of human rights and environmental concerns (however vague) and political independence can be thought as ethical outside the confines of the law.

There are also some less specific but still relevant requirements of the code. Employees are told to act with ‘personal integrity’, to the ‘highest standards of ethical conduct’, to never manipulate people, to listen to feedback, to ‘treat others with dignity and respect’ and to act in a ‘fair, ethical and non-discriminatory manner’ (JPMorgan and Chase 2014b: 14; 35; 41). Whilst these could be considered vague, they are still important ethical ideas to promote.


Code of Ethics

The Code of Ethics is short and its requirements ‘supplement, but do not replace, the firm’s Code of Conduct’. Like the Code of Conduct, it is a ‘term and condition’ of employment. Although most of its contents is contained within the Code of Conduct itself, it instructs finance related employees to act in an ethical manner (specifically regarding conflicts of interest) and with full compliance to the law. 

It specifically targets compliance with regulators such as the Securities and Exchange Commission in filing ‘full, fair, accurate, timely and understandable disclosure in reports and documents.’ Employees are not to ‘coerce, manipulate’ or ‘mislead’ authorities. They also are told to ‘promptly report’ any violation of the code (JPMorgan Chase & Co 2015c).

Similar to the Code of Conduct, the Code of Ethics can be summed up well by its introductory objective in that its purpose is to (JPMorgan Chase & Co 2015c):

“Promote honest and ethical conduct and compliance with the law, particularly as related to the maintenance of the firm’s financial books and records and the preparation of its financial statements”

In other words, the Code of Ethics is primarily concerned with compliance with the law. As with the Code of Conduct this could have ethical and/or self-interested motivations. 

Considering all the content is already contained within the Code of Conduct, the Code of Ethics as a separate entity seems unnecessary unless its existence is to emphasis compliance with the law as a chief concern (which seems self-interested in motivation).


Subsidiaries

Further restrictions are placed on senior level employees of particular subsidiaries involved in financial markets. It is important to note that these specific codes are required by law, rather than being a company initiative. Some of the rules present in the Code of Conduct and the Code of Ethics are in these specific codes, but there are some additional ones. These employees are required to disclose all securities to the Compliance department as well as all transactions in which they are involved. Senior staff are subject to a minimum holding period of these securities and have a ‘special responsibility’ to ensure the confidentiality of customer’s information. Finally, they are required to keep accurate records including lists of code violations, present and previous codes and people with access to MNPI (U.S. Securities and Exchange Commission 2007; U.S. Securities and Exchange Commission n.d.).

Revisions to the Code Since the Global Financial Crisis

There appears to be few revisions to the codes described. The publication of a Code of Ethics is first mentioned in a Form 10-K submission to the Securities and Exchange Commission on 31st December 2003 (U.S. Securities and Exchange Commission 2003: 1). This is confirmed by its first findable presence on an Internet Archive snapshot (of the Company’s website) on the 24th April 2005 (Internet Archive 2015a). Other than a formatting change in 2010 (Internet Archive 2015b), the wording is completely identical.

There also are no apparent or accessible amendments to the specific subsidiary codes of ethics since the Global Financial Crisis.

There are however, four previous Code of Conducts dated May 2009, May 2010, April 2011 and June 2013. Although not stated, there seems to be a policy of annual revision. 

The content of all versions is similar but there are four important changes to note between 2009 and 2014 versions (JPMorgan Chase & Co 2009).

Firstly, the newest version is more polished, more articulate and better laid out. The refinements are noticeable by the addition of specific examples, decision trees and the added ability to report anonymously to an independent organisation through several methods (JPMorgan Chase & Co 2014b).

Secondly, there is more emphasis on general ethical values in the 2014 version. Treating customers correctly for example, is not explicitly mentioned in the oldest version. Furthermore, there is no mention of either environmental stewardship or an employees obligations to be a global citizen.

Thirdly, although the content is the same, the newest version is much more specific. In the oldest version there is no mention on the use of drugs and alcohol in the workplace, no mention of social media restrictions, no mention of common bribes made to expedite performance, no mention of the inclusion of EU and American sanctions, and clearer guidelines on harassment, which now include specific terms like ‘bullying’ and ‘sexual harassment’ (JPMorgan Chase & Co 2014b: 15-17; 33-34).

Finally, the general tone of the oldest Code of Conduct stresses less (although it is still present) on legal compliance and the protection of the company’s reputation. This may be due to the continued problems with issues of unethical behaviour associated with the company.


The changes between the five versions are as follows.


Code of Conduct Changes 2009 to 2010

Very minor revisions to the code, mostly formatting but does include the provision on social media usage (JP Morgan Chase & Co. 2010: 7).


Code of Conduct Changes 2010 to 2011

This could be best described as an amendment to the 2010 version, with the text being almost identical save for a few additional details. For example, there is now a sharp differentiation between U.S. Government officials, Non-U.S. Government officials, and employees in terms of bribery policy. Employees are also now restricted from investing in ‘private offered unregistered funds organized by the firm’. A summary and conclusion is added as well as an independent reporting service offered through email, telephone and fax (JP Morgan Chase & Co. 2010; JP Morgan Chase & Co. 2011: 4-27)


Code of Conduct Changes 2011 to 2013

The changes constitute most the revisions present between 2009 and 2014. The formatting of the document is changed and the options for employees to report code violations now includes a website alternative. Decision trees and specific examples are also added (JPMorgan Chase & Co. 2013a).


Code of Conduct Changes 2013 to 2014.

The differences between 2013 and 2014 can be compared to the changes between 2010 and 2011, being superficial in nature by reformatting, rephrasing and streamlining the document. Some information is added, such as the differentiation between non-public information and MNPI (JPMorgan Chase & Co. 2014b: 11), and some are taken away, such as a diagram relating to information barriers (JPMorgan Chase & Co. 2014b: 13). The company’s statement on environmental issues is rephrased to perhaps appear slightly less committed, now stating a belief that ‘balancing environmental with financial priorities is fundamental’ (JPMorgan Chase & Co. 2014b: 39).


Section III – The Code in Practice

The rules described in a code of ethics mean nothing without some of form of implementation and encouragement to comply. As such it is prudent to ask what JPMorgan has done to achieve compliance. To start with, there are several methods outlined in the Code of Conduct itself, including its well laid out structure and explicit rules (which leave little room for unethical behaviour or misinterpretation).

The presence of a functioning and independent hotline (with explicit protection for whistle-blowers) able to accessed through fax, telephone, email and the internet (JPMorgan Chase & Co. 2014: 42) is an excellent method to encourage all-important whistle-blowers (Callaghan et al. 2012: 19).

JPMorgan Chase & Co. also encourages compliance through the availability of code specialists to every single employee (who are trained to give clarification on ethical matters), as well as mandatory annual affirmations of understanding, training sessions and severe punishments for breaches (including termination) (JPMorgan Chase & Co. 2014: 2-3). These training sessions and affirmations, if regarded as a ‘priming mechanism’ are useful in the context of promoting compliance (Davidson and Stevens 2013:71). The code also has been translated into several languages and ‘is available on the intranet’ to all employees (JPMorgan Chase & Co. 2014: 8).

JPMorgan Chase & Co. also implements the principles of its Code of Conduct, particularly environmental ones externally, being involved in the following organisations and agreements:

  1. Equator Principles: promotes minimum principles of ethical behaviour including the reporting of high greenhouse gas emitting projects and the implementation of labour standards (Equator Principles 2013; JPMorgan Chase & Co. 2014c).
  2. Adoption of UN Declaration of Human Rights: (JPMorgan Chase & Co. 2014c)
  3. Carbon Principles: agreement to address carbon risks and try to meet energy needs in ‘an environmentally responsible and cost-effective manner’ (Credit Suisse 2015; JPMorgan 2014c)
  4. Green Bond Principles: Investment in environmentally forward thinking project (JPMorgan 2014c; International Capital Market Association 2015)
  5. Extractive Industries Transparency Initiative: Full disclosure of payments made by oil, gas and mining companies to governments in order to prevent corruption and conflict (Extractive Industries Transparency Initiative 2015; JPMorgan 2014c)
  6. United Nations Principles for Responsible Investment: ‘Awareness of environmental, social and corporate governmental (ESG) issues’ (JPMorgan Chase & Co. 2014c; Principles for Responsible Investment 2015).
  7. Ceres Company Network: Promotion of environmental and social responsibility (Ceres 2015; JPMorgan 2014c).
  8. The Wolfsburg Principles: Advancement of robust financial frameworks and activities such as money laundering and corruption (JPMorgan Chase & Co. 2014c; Wolfsburg Principles 2015).

The regularly published Environmental and Social Policy Framework also includes specific bans on activities related to child labour, forced labour, resource exploitation on world heritage sites, illegal logging and companies that have no policies against uncontrolled or illegal use of fire in forestry (JPMorgan 2014c: 5-6). Enhanced review processes are also required for certain activities such as hydraulic fracturing (fracking), oil and gas projects, and any business related to palm oil (JPMorgan 2014c: 7-8). Periodic internal audits of policies are conducted to ensure compliance as well as annual environmental sustainability and corporate responsibility reports (JPMorgan & Chase 2014c: 20)

Additionally, the 2013 ‘How We Do Business’ report makes the following claims:

  • 16,000 employees added to ‘support our regulatory, compliance and control efforts’ as well as a million hours of training related to these activities (JPMorgan & Chase 2013b: 27).
  • Additional 2 billion dollar budget increase for regulatory and control issues as well as 1.7 billion spent on technology related to these activities (JPMorgan & Chase 2013b: 27).
  • The Establishment of a firm wide Risk Committee, a firm wide Fidiciary Risk Committee and a firm wide Control Committee in 2012 and 2013 (JPMorgan & Chase 2013b: 28).

Independent audits of the company are also conducted by PricewaterhouseCoopers (JPMorgan Chase & Co. 2015d).

Breaches of the Code of Conduct can result in both reduction of compensation and retroactive retrieval of salaries and bonuses (including equities) even if employees have left the firm, known as claw black provisions (J.P. Morgan 2014d: 25;44-45) . A prime example of this being applied is action taken against employees involved in the market manipulation for which the company was fined in October 2013 (Heineman 2012).


Success or Failure?

Despite these efforts there are undoubtedly ongoing issues within the company, even though the unethical behaviour the company (or its employees) is involved in is clearly forbidden by the code of ethics described. Despite the apparently genuine drive to enforce the code, these efforts don’t appear to have made any difference in reducing these problems. This perhaps reveals cultural tendencies within the institution that are proving difficult to change and that a code of ethics is inadequate in creating an ethical culture. Determining what other methods can be taken outside of a code of ethics should be regarded as an important extension and an opportunity for research.

Not all blame can be placed on JPMorgan however, with its independent auditor fined £1.4 million pounds for failing to conduct its audits properly which would have prevented some the misconduct described (White 2012).

Unchanged code, improved implementation, same culture?

Overall the JP Morgan’s Code of Ethics contains a distinguishing focus on legal compliance and protecting the company’s reputation which complicates an ethical evaluation of the codes.

The revisions to the code itself were either non-existent or minor apart from the significant amendment to the Code of Conduct in 2013, which added much more detail and improved formatting. The implementation of the Code shows JPMorgan Chase & Co. is making noticeable efforts to advance implementation and encourage compliance including an important and easily accessible independent whistle-blowing tool.

Yet, when these efforts are compared to the ongoing ethical problems listed in the first section, it appears the improvements are not sufficient to prevent unethical and damaging behaviour within the institution itself. This suggests more and potentially different types of initiatives are required.


Website linkage

http://sevenpillarsinstitute.org/case-studies/jpmorgan-chase-code-of-ethics-and-revisions-since-the-2008-financial-crisis

 


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http://www.jpmorganchase.com/corporate/About-JPMC/document/CodeofConduct_2010Edition.pdf [25 February 2015].

 Code of Conduct. 2011. [Online]. JPMorgan Chase & Co. Available:

http://www.jpmorganchase.com/corporate/About-JPMC/document/2011CodeofConduct.pdf [10 February 2015].

Code of Conduct. 2013a. [Online]. JPMorgan Chase& Co. Available:

http://www.jpmorganchase.com/corporate/About-JPMC/document/229048_2013_CodeofConduct_05.31.13_ada.pdf [10 February 2015].

How We Do Business. 2013b. [Online]. JPMorgan Chase & Co. Available:

http://files.shareholder.com/downloads/ONE/3912807319x0x799950/14aa6d4f-f90d-4a23-96a6-53e5cc199f43/How_We_Do_Business.pdf [9 February 2015].

Earnings Releases. 2014a. [Online]. JPMorgan Chase & Co. Available:

http://investor.shareholder.com/jpmorganchase/earnings.cfm [3 February 2015].

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http://www.jpmorganchase.com/corporate/About-JPMC/code-of-conduct.htm [25 January 2015].

Environmental and Social Policy Framework: April 2014. 2014c. [Online]. JPMorgan Chase & Co.

Available: http://www.jpmorganchase.com/corporate/Corporate-Responsibility/document/JPMC_Environmental_and_Social_Policy_Framework_MAY_FINAL_ada.pdf [14 February 2015].

2014 Proxy Summary. 2014d. [Online]. JP Morgan Chase & Co. Available:

http://files.shareholder.com/downloads/ONE/3912807319x0x741927/944b2966-bacb-4a37-b34e-cdc447ffaa78/JPMC_2014_Proxy_Statement.pdf [25 February 2015].

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https://www.jpmorgan.com/pages/company-history [3 February 2015].

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http://investor.shareholder.com/JPMorganChase/faq.cfm [14 February 2015].

Matusseek, K. 2015. [Online]. JPMorgan Bankers Charged over $64 Million in Swap-Sale Losses.

Bloomberg. Available: http://www.bloomberg.com/news/articles/2015-02-09/two-bankers-charged-in-germany-over-swap-sale-to-pforzheim [7 February 2015].

The Six Principles. 2015. [Online]. Principles for Responsible Investment. Available:

http://www.unpri.org/about-pri/the-six-principles/ [14 February 2015].

Stempel, J. 2013. [Online]. JPMorgan in $23 million settlement with clients over Lehman. Reuters.

Available: http://www.reuters.com/article/2013/08/16/us-jpmorgan-lehman-settlement-idUSBRE97F0YJ20130816 [7 February 2015].

Treanor, J. 2014. [Online]. Foreign exchange fines: banks handed £2.6bn in penalties for market

rigging. The Guardian. Available: http://www.theguardian.com/business/2014/nov/12/foreign-exchange-fines-ubs-hsbc-citibank-jp-morgan-rbs-penalties-market-rigging [27 January 2015].

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[Online]. The Treasury. Available: http://www.treasury.govt.nz/government/financialstatements/yearend/jun14/fsgnz-year-jun14-1.pdf [3 February 2015].

Code of Ethics. n.d. [Online]. U.S. Securities and Exchange Commission. Available:

http://www.sec.gov/Archives/edgar/data/1217286/000119312511060747/dex99p11.htm [14 February 2015].

 Form 10-K. 2003. [Online]. U.S. Securities and Exchange Commission. Available:

http://www.sec.gov/Archives/edgar/data/19617/000095012304002022/y94051e10vk.htm [14 February 2015].

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http://www.sec.gov/Archives/edgar/data/908186/000090818608000032/ex-jpmcodeofethics.htm [13 February 2015].

J.P. Morgan Settles SEC Charges in Jefferson County, Ala. Illegal Payments Scheme. 2009. [Online].

U.S. Securities and Exchange Commission. Available: http://www.sec.gov/news/press/2009/2009-232.htm [13 February 2015].

SEC Charges J.P. Morgan Securities with Fraudulent Bidding Practices Involving Investment of

Municipal Bond Proceeds. 2011. [Online]. U.S. Securities and Exchange Commission. Available: http://www.sec.gov/news/press/2011/2011-143.htm [13 February 2015].

JPMorgan Chase Agrees to Pay $200 Million and Admits Wrongdoing to Settle SEC Charges. 2013.

[Online]. U.S. Securities and Exchange Commission. Available: http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539819965#.VOK4yS4fsxs [7 February 2015].

White, A. 2012. [Online]. PwC fined record £1.4m over JP Morgan audit. The Telegraph. Available:

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Wolfsburg Principles. 2015. [Online]. Wolfsburg Principles. Available: http://www.wolfsberg-

 

by 趙永祥 2015-10-23 15:36:43, 回應(0), 人氣(343)


A case study on the ethics of finance 


HSBC Money Laundering Case: 

“Too Big To Fail” does not mean “Too Big to Jail”

September 24th, 2013 by Kara in Case Studies

The Problem stated as follows.

Alphonse Capone









Some banking institutions have become so large criminal prosecutions resulting in revocation of banking charters may negatively affect the national, and perhaps the global, economy. The U.S. Attorney General and other prosecutors are thus left with a moral dilemma: ensure justice through prosecution or forego criminal proceedings to protect the economy and society at large.

HSBC and Money Laundering

In December 2012, multinational banking institution HSBC was penalized a record $1.92 billion by the United States for violating laws designed to prevent money laundering and other illegal financial activity. HSBC was under consistent suspicion and twice given warnings and orders to strengthen its anti-money laundering programs by the U.S. between 2003 and 2010 but failed to make the proper adjustments. The $1.92 billion penalty, issued under the Bank Secrecy Act, was handed down after a report and subsequent investigation that confirmed the bank had set up offshore accounts for drug cartels and suspected criminals in Jersey. HSBC banking executives admitted to laundering as much as $881 billion dollars.

Players

HSBC North American Holdings, Inc.: parent company of HSBC Group, one of the world’s largest banking and financial services groups. HSBC has more than 6900 offices in over 80 countries.

HSBC Bank USA: federally chartered subsidiary of HSBC North American Holdings, Inc.; headquartered in McLean, Virginia with its principal offices in New York City. HSBC  Bank USA is the specific entity charged with violating the Bank Secrecy Act.

Eric Holder: United States Attorney General; publicly defended the decision not to criminally prosecute HSBC Bank USA executives.

HSBC Bank USA Executives: Specifically those responsible for the lax monitoring programs and other negligence that violated the Bank Secrecy Act.

HSBC Bank USA Employees: would lose their jobs if HSBC were forced to cease banking operations in the United States.

The United States’ (and possibly the global) economy: As stated by Attorney General Eric Holder, the national economy will suffer greatly if HSBC’s U.S. banking charter is revoked.

United States Department of the Treasury: As one of the regulators of HSBC Bank USA’s financial affairs the Treasury is tasked with advising the Department of Justice on the economic effects of prosecuting HSBC.

Office of the Comptroller: As the regulator of HSBC Bank USA’s banking charter, the   Comptroller can revoke HSBC Bank USA’s banking privileges in the U.S. if its executives are prosecuted and convicted.

Instruments

Bank Secrecy Act (31 USC §5311): enacted by Congress to require banks and other financial institutions to create and maintain anti-money laundering programs and other practices to prevent terrorist financing and other financial crimes. In addition to internal programs and monitoring, the Bank Secrecy Act (BSA) also requires ongoing employee training and due diligence for foreign correspondent accounts.

Deferred Prosecution Agreement: To avoid criminal prosecution for violations of the BSA, HSBC executives agreed to pay a $1.92 billion fine and comply with elevated monitoring standards for a probationary period of five years.

Events           

From 2003-2006, HSBC Bank USA was under heavy suspicion by United States regulators and operated under a written agreement to correct the deficiencies of their operational practices. HSBC Bank USA specifically agreed to enhance its anti-money laundering program to achieve adequate compliance with the Bank Secrecy Act.

Between 2006 and 2010, HSBC Bank USA violated several components of the BSA: Money laundering risks associated with doing business with certain Mexican customers were ignored, compliance issues at HSBC Mexico were overlooked, and a BSA-adequate anti-money laundering program was not implemented. The Court notes four significant HSBC Bank USA failures:

  1. HSBC failed to obtain and maintain due diligence on HSBC Group Affiliates.
  2. HSBC failed to adequately monitor over $200 trillion in wire transfers between 2006 and 2009 from customers in nations classified as “standard” or “medium” risk ($670 billion in wire transfers specifically from HSBC Mexico).
  3. HSBC Bank USA failed to adequately monitor billions of dollars in U.S. banknote purchases.
  4. HSBC Bank USA failed to provide proper staffing and resources necessary to maintain an effective anti-money laundering program.

As part of the Deferred Prosecution Agreement, HSBC Bank USA admitted to gross violations of the Bank Secrecy Act, including failure to establish and maintain an effective anti-money laundering program, failure to establish due diligence, and involvement in the laundering of over $881 billion.

The Penalty

The record-setting fine, comprised of $1.256 billion in forfeiture and $665 million in civil penalties, allows HSBC to temporarily thwart criminal prosecution pending a probationary period of compliance with anti-money laundering standards. The probationary period consists of a five-year agreement with the U.S. DOJ that includes an independent monitor of HSBC’s internal anti-money laundering programs, bonus deference by the bank’s top executives, and retraction of bonuses from some current and former executives who had particular involvement in the willful breach of U.S. regulations.

Public Controversy

In March of 2013, Attorney General Eric Holder defended the U.S. government’s decision not to pursue criminal prosecution of HSBC by claiming that prosecution of such large institutions has a negative impact on the national economy. His statement stirred some outrage. The notion that the largest corporations, deemed equal to people under the law by the U.S. Supreme Court in the Citizens United case in 2010, are now afforded freedom from criminal prosecution as well.

At the forefront of prosecution advocates is Senator Elizabeth Warren, who voiced publicly her disdain for the decision not to prosecute HSBC for money laundering. She posed this question to the Department of Justice (DOJ): “How many billions of dollars of drug money do you have to launder…before someone will consider shutting down a bank?” Not one Treasury or Justice Department official offered her a direct answer. One thing is evident: The Justice Department seems to hold all the cards in deciding the fate of HSBC’s ability to continue operating in the U.S. The Comptroller cannot revoke its charter without a criminal conviction and the role of the Treasury is simply to advise the DOJ on an institution’s impact on the economy. Regardless of the economic reasons, the decision not to prosecute questions the integrity of the entire justice system. Can we justify deferring prosecution for willful criminal activity in the name of protecting the national economy? The debate presents an ethical dilemma between justice and utilitarianism.

Utilitarian Approach

Utilitarianism, also known as the “greatest happiness principle” holds that decisions and actions are proper as long as they promote proportional utility, and by the same accord improper as they produce an overall negative utility. A utilitarian view, then, would advocate an act if a greater benefit would be afforded to a larger number of individuals in society. This principle supports the Department of Justice decision not to prosecute HSBC, because not prosecuting HSBC benefits a greater number of individuals in society through protecting the economy from harm, even at the expense of letting criminal activity go largely unpunished.

Under a traditional utilitarian view, then, the Justice Department’s decision not to criminally prosecute HSBC officials seems sound, as a larger portion of society benefits from HSBC maintaining operations (not to mention the number of saved jobs) and keeping the economy from further suffering in already difficult financial times. The record-setting monetary penalty and the probationary monitoring period are presumably aimed at deterring future wrongdoing by HSBC and other large financial institutions. However, in spite of $1.92 billion being the largest fine imposed on any banking institution in history, it does not reflect an amount that could effectively deter a financial institution the size of HSBC. According to Bankers Almanac, HSBC’s annual before-taxes profit totals more than $23 billion.

The $1.92 billion fine handed down by the U.S. represents roughly a month’s profit.

If HSBC and other large banks are not effectively deterred from continuing illegal and unethical financial practices, at some point in time the utilitarian outcome of laundering money for illegal organizations becomes adverse to the greatest number of people in society.

In fact, a deeper analysis shows that pursuing criminal prosecution of HSBC’s executives likely yields a greater utilitarian outcome in the long run. While the immediate effect of prosecution may adversely affect a great number of individuals in society by means of a blow to the economy and the loss of jobs, the long term effects of allowing a banking institution like HSBC to engage in criminal activity with no risk of criminal prosecution, jail time, or even the loss of its banking license, presents a moral hazard. A $1.92 billion fine for laundering upwards of $881 billion hardly seems like incentive to exercise due diligence in future practices. In fact, the outcome of HSBC’s case can actually provide incentive for other banks to be more lax with their anti-money laundering practices.

Among the most alarming effects the non-prosecution decision produces is the harm done to the large number of individuals affected by drug trade. That being the case, both justice and utility seem best served by criminal prosecution of HSBC executives.

Justice Approach: Retribution and Deterrence

Society has always had a keen interest in providing justice for the wrongdoings of individuals. As for the intentional breaking of U.S. laws and sanctions by HSBC executives, justice can be readily sought in the forms of retribution and deterrence. Retributive justice is simply providing adequate punishment to lawbreakers in accordance with their offenses. Retribution provides two important results: disincentive for the offender to recommit the wrongful act and a general deterrence to the rest of society who may contemplate acting wrongfully. While retribution is generally served as a calculated punishment proportional to the wrongful act, deterrence is most often pursued by a punishment that outweighs the wrongful act, to ensure avoidance of future wrongdoing in general. Often, these punishments come in the form of large fines.

The conduct of HSBC’s executives in knowingly failing to adhere to U.S. sanctions and regulations is certainly unjust. In making the decision to defer prosecution of HSBC Bank USA executives, the primary consideration of the United States government was to prevent harm to an already struggling economy. While instances may exist when other consequences may mitigate an application of justice, the long-term effects of avoiding prosecution for the criminal acts of HSBC are too great. When government allows big financial institutions to go largely unpunished for laundering vast sums of money for criminal organizations such as drug cartels, it is essentially endorsing the immeasurable amount of harm associated with the day-to-day activities of global drug trade. Justice for perpetuating such criminal enterprises cannot be adequately administered by a mere financial penalty.

Deontological Aspect: Prosecutorial Duty

A deontological approach asserts individuals are morally obligated to act according to a set of principles regardless of outcome. Rational people have a duty to act ethically, no matter the consequences. The criminal justice system of the United States is based largely on deontological ideals. Prosecutors have a duty to carry out justice.

Prosecutors and Attorneys General, like all government officials, are elected or appointed under the promise to uphold the laws. Prosecutors, by design, are charged with the responsibility to fairly and appropriately pursue punishment for wrongdoers in society. While all human beings have the same general obligation to act morally, prosecutors take on a special obligation, or duty, when taking office. Prosecutors assume an elevated duty to make certain decisions as a part of their role in the justice system. As prosecutors accept taking on the role of pursuing justice for illegal behavior, they assume an ethical duty to do so fairly and diligently no matter the offender.

The Attorney General and the DOJ failed in their prosecutorial duties. They did not prosecute HSBC officials because of an uncertain forecast outcome (economic harm). Ultimately, they failed to provide justice for gross wrongdoing. The decision not to prosecute also prevents other regulators from punishing HSBC. The Court, in upholding the financial penalty and the Justice Department’s decision not to prosecute, stated its need to give broad prosecutorial discretion to the Executive Branch in matters like these. Hence, the Comptroller is unable to completely revoke HSBC’s U.S. banking privileges without some form of conviction by the Justice Department. The Deferred Prosecution Agreement essentially lets HSBC off the hook with a $1.92 billion pass for laundering more than $880 billion.

Conclusion

The ethical analysis above applies theories of justice, utilitarianism, and deontology to the Department of Justice decision not to pursue prosecution of HSBC executives. The analysis suggests that criminal prosecution is probably the right move, rather than the deferred prosecution agreement currently in place. The reasons are:

  1. The $1.92 billion fine and 5-year probationary monitoring period is unlikely to deter future misconduct.
  2. The long-term consequences of the Deferred Prosecution Agreement may outweigh its immediate utility.
  3. The DOJ is not fulfilling its prosecutorial duty to pursue punishment for those who violate the law.

While some may believe the Deferred Prosecution Agreement promotes the best interests of the United States, its long-term effects may ultimately pose a greater danger.

 BY: SAM STORRS

 

Works Cited

 

1. HSBC’s Deferred Prosecution Agreement, Statement of Facts. Case 1:12-cr-00763-ILG     Document 3-3, December 11, 2012.

Accessed online: http://www.justice.gov/opa/documents/hsbc/dpa-attachment-     a.pdf

2. 31 U.S.C. §5311 (Bank Secrecy Act), Declaration of Purpose.

Accessed online: http://www.law.cornell.edu/uscode/text/31/5311

3. Mill, John Stuart. Utilitarianism. Edited by Oskar Piest. Prentice-Hall, Inc. 1957.

4. Stempel, Jonathan. HSBC Wins OK of Record $1.92 Billion Money Laundering Settlement.       Reuters. Tue. July 2, 2013.

Accessed online: http://www.reuters.com/article/2013/07/02/us-hsbc-       settlement-laundering-idUSBRE9611B220130702

5. DeGeorge, Richard T. Business Ethics, Seventh Edition. Pearson Education, Inc. 2010.

6. Lopez, Linette. Elizabeth Warren Savaged A Treasury Official During A Hearing On HSBC’s    International Money Laundering Scandal. Business Insider. March 7, 2013.

Accessed online: http://www.businessinsider.com/elizabeth-warren-hsbc-money-   laundering-2013-3

by 趙永祥 2015-10-23 15:31:28, 回應(0), 人氣(156)


A case study on the ethics of finance 


The Ethics of the Swiss National Bank’s Currency Intervention

(瑞士央行干預匯市是否符合金融倫理?)

May 19th, 2015 by Kara in Case Studies

SNB

By: Chloe Sevil








On Thursday, 15 January 2015 the Swiss National Bank (SNB) upset the fondue pot. The SNB unexpectedly announced it would end the Swiss Franc (the franc) peg to the Euro, three days after this policy had been reaffirmed. Many companies were adversely affected when the franc appreciated between 20-30% against major currencies (see diagram) and the Swiss stock market dropped by 14 percent.[1] 

The SNB originally intervened to avoid excessive overvaluation of the franc. There is a mix of economic, social and political rationales for currency manipulation. The reason for the Swiss National Bank’s currency intervention in 2011 is common to many central banks that choose to manipulate the value of their currencies. The central bank wanted to maintain Swiss economic stability. 

This article examines whether these motivations are ethically justifiable given the interconnectedness of the global economy and the externalities imposed on neighboring States.

(本研究主要在探討這些動機是否合乎金融倫理之立場,有考慮到全球經濟的相互聯動性和與可能產生強加於鄰國的外部性效果。)

 

Swiss Currency

 

 Rationale for Central Bank Currency Intervention

In 2011, the euro area sovereign debt crisis metastasised from a problem affecting chronically troubled EU states to one that threatened the single currency itself.[1]Switzerland voted to not join the European Economic Area (now the EU) in 1992. Since that decision Switzerland has suffered the longest period of economic stagnation the second half of the twentieth century[2]. Yet during the Euro crisis of 2011, the vote looked prescient. The country remained an island of relative calm and stability amongst the soaring unemployment, debt crisis and turmoil of the euro area. Switzerland’s stability looked increasingly attractive investors looking for safe havens. The franc became a ‘safe asset’[3] and cash began flooding in, causing the already overvalued franc to appreciate. The concern of the SNB is seen in the increasingly strained tone of press releases issued in quick succession in August 2011, documenting attempts to constrain appreciation. The SNB ‘takes’, ‘expands’, then, ‘intensifies’ measures against the strong franc (emphasis added). 

Finally, on 6 September 2011 the SNB states it will ‘no longer tolerate’ a EUR/CHF exchange rate below a rate of CHF 1.20 and introduces a currency peg it will ‘enforce… with the utmost determination’, ‘prepared to buy foreign exchange in unlimited quantities.’[4]


Why was the SNB so concerned?

The explanations are described as follows.

  1. Exports become uncompetitive

Like many other central banks that intervene in currency markets, the SNB was concerned the franc did not reflect the underlying fundamentals of the economy. Usually, the interaction of supply and demand (e.g. demand for the franc from foreign importers of Swiss goods who need to buy francs to pay for the goods) determines a floating exchange rate. However when investors are hyper nervous, as they were in the euro crisis, heightened speculation rather than fundamentals determine the equilibrium exchange rate. For an economy such as Switzerland’s, where exports constitute 50% of GDP,[5] currency appreciation can cause economic distress. In the year to 1 August 2011, the franc appreciated by around 20%.[6] Your favorite block of Swiss cheese goes from five euros to six and the wedge of Italian Parmesan on the next shelf starts to look more affordable. Sales of Swiss-made watches, pharmaceutical products and machinery (the bulk of Swiss exports) fell significantly in 2011. The SNB decided to intervene to prevent further damage to the economy.


  1. Economic Uncertainty

Abnormal currency movements also damage the economy by creating an uncertain economic environment. When businesses face fluctuating prices (the Swiss cheese producer is unsure of its selling price of cheese) a ‘wait and see’ attitude sets in.[7]When businesses encounter an uncertain economic environment, they postpone investments and hiring until conditions stabilize have greater clarity on investment returns. Consequently, investment declines and the economy slows.

The cost of capital also increases, as lenders require a higher rate of return to compensate for increased lending risk. Therefore, a fluctuating currency causes instability and contributes towards an economic downturn.


  1. Protecting Infant Industries

Protection of exporters, a reduction in instability and protection of the broader economy are just three justifications for state sanctioned currency intervention. The protection of infant industries is another, first proposed by John Stuart Mill.[8]Tariffs and subsidies help but artificially appreciating the currency also makes infant industries more competitive by making their products cheaper on the world market. It has the added positive effect of boosting exports of other exporting industries.


  1. Instrument of Power

A fourth, and more sinister use of currency intervention is as an instrument of power. Currency intervention can be used to destabilize a state’s economy for a political motive. A look through history highlights multiple examples: Japan’s manipulation of China’s currency to consolidate power after its invasion of China in the late 1930s; Nigeria’s intervention to quash civil war in the 1970s; and Washington’s refusal to support the pound sterling in the 1956 Suez debacle.[9]This strategy is definitely not ‘playing nice’ in the playground of international diplomacy.

Clearly, states or their independent central banks intervene in currency markets for a variety of reasons – to stabilize excessive exchange rate volatility, protect infant industries, boost exports or to destabilize another State’s economy. The question is whether these rationales are ethically justifiable.

Generally, Is Currency Intervention Ethically Justified?

A consequentialist approach lends limited support to currency intervention. In a nutshell, consequentialism evaluates actions based solely on weighing the consequences of the action against a desired outcome. In general, in the case of currency intervention, the desired ends are: boosting exports, increasing competitiveness and others discussed above, and the action is currency intervention.

(在一般情況下,央行進行貨幣干預在倫理上是否合理?

結果主義的觀點認為:對於央行干預匯市此一行為的支持相當有限。概括地說,結果主義主要評價重點著重在權衡理想的結果行動而卻反對希望欲達到的結果行動。一般來說,央行進行貨幣干預的主要目的在,刺激出口,提高產業競爭力等所要達成之相關目的,而其主要對策就是進場干預匯市。)


Firstly, the ends of currency intervention are rarely achieved. Despite the numerous times currency intervention has been used in an attempt by states to boost exports and competitiveness, the policy’s effectiveness is mixed or even negligible. When a state artificially suppresses its currency to make domestic products more globally competitive, the effect is at best, limited. Other states recognize the currency manipulation and in retaliation, suppress their currencies as well. The fact that any net positive benefit of currency manipulation is so fleeting means that manipulation cannot be ethically justified through a consequentialist viewpoint.


Not only are the positive benefits of manipulation fleeting there may actually be unintended negative effects of currency manipulation. States may use intervention to protect infant industries, reasoning that protection is necessary in the early stages of development, until an industry can gain economies of scale to be able to compete globally. This strategic reasoning is seductive but it rarely achieves the intended result. Instead, protected infant industries fail to grow up – they continue to rely on government aid and on protection to survive instead of benefiting from the fortifying lessons of a free market. Ongoing protection of an infant industry is a drag on state revenues – the government needs to keep buying foreign currency to continue to suppress a currency. 

This is a needless loss when funds can instead be used to invest in income generating projects or upgrading infrastructure. Related to this factor, an artificially depressed currency means imports are relatively more expensive. For consumers, the price increase limits the goods and services available to them and increases inflation, thus, lowering living standards. Effectively, suppressing the currency directly benefits a small industry group at the expense of wider society. These negative effects demonstrate the harmful results of currency intervention and indicate currency intervention is generally not ethically justifiable from a consequentialist viewpoint.


Additionally, the ends may be objectively bad in themselves. When a state intervenes in the currency market to further a political agenda, such as during the Nigerian civil war when Nigeria actively sought to bankrupt a secessionist state, the ends are objectively bad. Currency manipulation should not be used as an instrument to weaken the economy of another state. In a world where states are so closely connected, such malignant attacks not only directly weaken a state, it also may weaken the global economy.


But…Was Currency Pegging in Switzerland Ethically Justifiable?

In pegging the franc, the SNB sought to reduce economic instability, protect Switzerland’s exporting industry and the economy as a whole. In an extremely unstable economic climate, the SNB’s currency intervention successfully reduced the level of uncertainty faced by Swiss businesses. Export industries, constituting a significant part of the economy, knew that an exchange rate of CHF 1.20 was guaranteed. This facilitated investment, hiring and economic growth. As a result, Switzerland’s economy grew by an average of 1.7%[10] – an impressive feat given the dismal performance of other economies in the euro zone. For the three-year period the SNB pegged the franc, the euro zone averaged economic growth of zero percent.[11]

The SNB successfully attained its desired outcomes in pegging the franc. The ends of reducing instability and protecting the economy were achieved. The SNB wished to ensure Switzerland’s economic growth and therefore, the welfare and standard of living of the Swiss. The motive of the central bank in protecting the interests of Swiss citizens was fundamental to its currency intervention. Analyzing the consequences of the SNP’s action, it appears as if the consequences met the desired outcomes – from the Swiss point of view.

In sum, central banks intervene in currency markets for a complex mix of political, social and economic reasons. Empirical analysis of the effects of currency intervention demonstrates that often, the intended aims of currency intervention are not achieved. In general, a consequentialist ethical philosophy does not support currency intervention, but perhaps the case of SNP currency manipulation may be an exception.

 

Notes

[1] ‘Charting the Year’ The Economist 31 December 2011

[2] Marc-Andre Miserez Switzerland Poised to Keep EU at Arm’s Length (2012) Swissinfo http://www.swissinfo.ch/eng/switzerland-poised-to-keep-eu-at-arm-s-length/34083578 at 6 February 2015

[3] ‘Why the Swiss Unpegged the Franc’ The Economist 18 January 2015

[4] ‘Swiss National Bank Sets Minimum Exchange Rate at CHF 1.20 Per Euro’ (Press Release 6 September 2011)

[5] Switzerland (2014) The CIA World Factbookhttps://www.cia.gov/library/publications/the-world-factbook/geos/sz.htmlaccessed at 18 January 2015

[6] Historic Lookup, X-Rates http://www.x-rates.com/historical/?from=CHF&amount=1.00&date=2010-08-01 accessed at 18 February 2015

[7] Ruediger Bachmann, Steffan Elstner and Eric Sims, ‘Uncertainty and Economic Activity: Evidence from Business Survey Data’ (Working Paper No 16143, National Bureau of Economic Research, 2010) 2.

[8] John Stuart Mill, Principles of Political Economy with some of their Applications to Social Philosophy. William J. Ashley, ed. 1909. Library of Economics and Liberty. 4 March 2015. <http://www.econlib.org/library/Mill/mlP.html>.

[9] Jodi Liss, ‘Making Monetary Mischief: Using Currency as a Weapon’ (2008) 24World Policy Journal 4, 29.

[10] Switzerland’s GDP Annual Growth Rate, (2015) Trading Economicshttp://www.tradingeconomics.com/switzerland/gdp-growth-annual at 6 February 2015.

[11] Euro Area GDP Growth Rate, (2015) Trading Economicshttp://www.tradingeconomics.com/euro-area/gdp-growth at 6 February 2015.

[1] SMI, (2015) Swiss Exchange http://www.six-swiss-exchange.com/news/overview_en.html at 6 February 2015

 

by 趙永祥 2015-10-17 07:21:05, 回應(1), 人氣(548)


Taiwan’s Credit Card Crisis

I. Facts of the Case

Beginning in 1990, the Taiwanese government allowed the formation of new banks. These new banks lent large sums of money to real estate companies with the goal of expanding their businesses and increasing profits. However, after a couple of years of expansion, the real estate market became saturated and profits from the sector stopped growing.

The new banks turned to other new business – credit cards and cash cards. In expanding this area of business, banks lavished money on commercials encouraging people to apply for credit cards to consume, apparently without consequences. These banks lowered the requirements for credit card approvals to get more customers. In time, young people became target customers. Although young people tend not to have enough income, banks still issued credits cards to them. This case study discusses the ways in which the banks are dealing with the resulting bad debts from incautious credit card lending and the ethics of their methods.


II. The Problem

In Taiwan, in February 2006, debt from credit cards and cash cards reached $268 billion USD.  More than half a million people were not able to repay their loans.  They became “credit card slaves”, a term coined in Taiwan to refer to people who could only pay the minimum balance on their credit card debt every month (“News & Important policy”). This issue resulted in significant societal problems. Some debtors and their families committed suicide because of the debt, some became homeless due to repossession of their homes, others could not afford to pay their children’s tuition. Some credit card slaves sold illegal drugs to repay the banks. The sometimes violent and threatening collection practices of certain banks added pressure to lenders, particularly those in lower income groups.

The Taiwanese government was forced to solve these problems to save the financial system and prevent further societal problems. Based on the Taiwanese Department of Health report, 2,172 people committed suicide in 1997, 4,406 in 2006, and 4,128 in 2008. (“Health Statistics in Taiwan 2008, “ para. 2) The suicide rate in Taiwan is the second highest in the world. The suicide rate increased 22.9% compared to the rate in 2005, and the main reason is unemployment and credit card debt (para. 2).


III. Dealing with the Problem

  1. A. Issue new regulations to banks

In 2005, to prevent more and more new credit card or cash card slaves from appearing, the Taiwanese Finance Supervisory Commission issued some orders to require banks to modify their requirements of credit card and cash card applications. Some of the changes included raising the income and job requirements, prohibiting improper credit card commercials, prohibiting inappropriate collection behaviors and prohibiting compound interest.

In the past, banks issued credit cards and cash cards to students even if the students did not have a job. Therefore, many banks sent their credit card salesman to colleges to convince students to apply for credit and cash cards, enticing them with low interest rates. As these students lacked practical experience and financial knowledge, young people used their credit and cash cards relentlessly without paying attention to how much interest they would have to repay.

After the new regulations came into force, credit card applicants are required to have jobs and a specified level of income. Therefore, it is now difficult for young people without enough income to apply for credit cards and cash cards.

  1. B. Sell the bad debt to an asset management corporation (AMC)

To deal with existing bad debts, banks often sell the bad debts to an AMC.

(a) The function of an AMC

The main function of an AMC is to take bad debts from banks.  An AMC can help control risk for finance activities and improve a bank’s balance sheet by taking on some of its bad debts. In 2000, the Taiwanese Congress passed the Financial Institution Merger Act. Based on the Act, foreign companies like Lone Star, Merrill Lynch and Lehman Brothers are allowed to fund an AMC. At the same time, many Taiwanese banks jointly funded some AMCs.

An AMC is in a better position to deal with bad debts than banks. In Taiwan, company reorganization cases usually involve many banks because the company borrowed money from many banks. As there is more than one creditor, it is hard to reach an agreement about the company’s reorganization plan without taking years. When most banks sell their bad debt to an AMC, the number of creditors fall and it is easier to reach a company reorganization agreement.

(b) Create a Public AMC

However, the debtors from credit cards and cash cards are not corporations. Thus, a traditional AMC cannot use the usual ways to collect debt.  In addition, there are many AMCs in Taiwan that compete to collect bad debts. To handle these problems the Taiwanese Finance Supervisory Commission strongly advised the bankers association to create Public AMCs to deal with the credit card issue.

On March 10th, 2006, the banker’s association reached an agreement to create a Public AMC to deal with credit card debt and to help low-income people to solve their debt.

(1)  The structure of a Public AMC

The Public AMCs are funded by banks, including creditor banks. The percentage of investment of each bank is based on the amount of debt and how long the debt is expired. The banks injected bad debts that existed before 2005 and were more than 180 days overdue into the Public AMC. The Public AMC is managed by Taiwan United Asset Management Corporation.

(2)  The methods to deal with the debt

The public AMC does not collect payments on debt from low-income individuals, students, disabled people and the unemployed until they find a job and have income.

Debtors can can contact the public AMC and transfer their cases to a social welfare agency. The agency will enroll these debtors into career training programs, loan more money to help them to build their own business, and provide the financial management education or psychological counseling they require.

Based on the experience of the Korean government, debtors who want to negotiate with the Public AMC, have to repay three percent of their total debt first.

(3)  The purpose of the Public AMC

The AMC will not try to modify the conditions of negotiation, but put all the debt under one creditor to reduce the need and stress of dealing with multiple creditors.

The AMC encourages borrowers who do not have the ability to repay loans to report to the AMC. The AMC can help borrowers to negotiate with banks to suspend interest payments during negotiations.

  1. C. Pass “Debtors Repayment Regulation”

In 2005, the Taiwanese Finance Supervisory Commission required banks to create a negotiation system between banks and the debtors. At that time the Taiwan’s bankruptcy laws applied to corporations and individuals who had assets. The law was unable to deal with credit card debt.

In July 2006, the Taiwanese Congress passed the Debtors Repayment Regulation. There are four sections in the regulation: general rules, regenerate, liquidate and supplementary provisions. The main purpose of the regulation is to help people who do not have money and who cannot repay their debts to clear their debts and start over.

The Regulation protects borrowers from losing their homes during the debt restructuring process.  Borrowers can negotiate with their creditors directly but if they cannot reach an agreement, the court can make a decision for them.  In negotiating the settlement amount, borrowers are allowed a stipend to pay living expenses.  The stipend is modest and does not afford the borrower any luxuries.  Borrowers are not allowed to borrow more money to maintain a luxury lifestyle.

In November 2005, the average debt of a credit card holder who was unable to repay his debt was US$20,000 USD (“News & Important Policy” 2005). After the Debtors Repayment Regulation had been in effect for 2 years, the average debt increased to US$88,000 USD.   During that period, sixty percent of debtors could only pay their minimum monthly balance every month (“News” 2008). Half the debtors admitted they had considered suicide (“News” 2008). However, in February 2010, the average debt decreased to US$43,000.  The Debtors Repayment Regulation had forced banks and borrowers to work together to solve the problem (“News & Important Policy” 2010).


IV. Ethical Issues

Consequentialist theories hold that only the consequences, or outcomes, of actions matter morally. In this case, banks wanted to make more money, so they allowed a lot of young people to apply for credit cards and cash cards. In the short term, bankers made a lot of money. In the longer term most credit card users were unable to repay their debt, resulting in serious social problems. Therefore, banks’ actions were morally wrong.

Deontological theories base morality on certain duties, or obligations, and claim that certain actions are intrinsically right or wrong, that is, right or wrong in themselves, regardless of the consequences that may follow from those actions. In this case, making money is not morally wrong in itself.  However, the banks’ method of attracting young people without sound financial support to borrow money using credit cards and cash cards, is morally wrong. By lending money to people who did not have the ability to repay the loans, banks violated their fiduciary duty of acting (as agents) in the interest of their customers. In addition, the banks were using their credit card customers as a means to an end (making profits). This act further violates the second version of Kant’s duty based ethics. The banks should have applied stricter borrowing requirements and had the intent of helping customers rather than using them to make money. In Kant’s ethical theory, intention counts.

Utilitarianism states that actions are morally right if and only if they maximize the good. Here, in the short term, the banks made a lot of money. However, the outcome of the credit card issue is serious social problems. The banks did not maximize the good.

According to the three moral theories, the banks’ actions were morally wrong.


V. Conclusion

After the credit and cash card issue exploded, the Taiwanese Finance Supervisory Commission issued some orders to require the banks to change their credit and cash card policy, and strongly advised the banks to fund a public AMC to deal with this issue. Taiwanese Congress also passed the Debtors Repaying regulation to give a way to these debtors to repay their debt and rebuild their life. Although regulation provides new ways to help the debtor, there are still some problems.

First, after the regulation was implemented, many debtors complained about the difficulty of reaching an agreement with banks under the settlement procedure as banks’ conditions were too severe. For example, a bank required a monthly repayment of US$930 per month from a debtor even though his salary was US$1,000 per month but the bank wants him to repay the money by $930 USD per month.

Second, an AMC is not included in the settlement procedure. Thus, when the debtor reaches an agreement with the bank, and if the bank subsequently sells the debt to an AMC, the agreement between bank and debtor is negated.  The AMC can therefore can once again, require the debtor to repay all the money.

These solutions are a temporary solution to the credit card problem. The real problem is the bankers’ lack of ethics. Consequently, the Taiwanese government should give educate bankers and people on ethics. The best way to prevent similar occurrences is to teach people to regulate their behaviors by themselves.[1]

To that end the leading universities in Taiwan such as National Taiwan University’s Executive MBA, National Chengchi University, National Taipei University, and National Cheng Kung University make business ethics classes a requirement. Yet, a class in business ethics generally is not a guarantee that graduates will be ethical in their work. Perhaps however, the classes will raise the moral consciousness of a few.

 

BY: ERIC WANG

 

Citations:

“IMF Loss Estimate 2009.” International Monetary Fund. 15 June 2011.

<http://www.imf.org/external/pubs/ft/weo/2009/01/>.

“News & Important policy.” Taiwanese Financial Supervisory Commission. 1 June 2011

<http://www.fsc.gov.tw/Layout/main_ch/index.aspx?frame=1>.

“Health Statistics in Taiwan 2006.” Taiwanese Department of Health. 1 June 2011

<http://www.doh.gov.tw/EN2006/index_EN.aspx>.

“Financial Institution Merger Act.”  Laws & Regulations Database of The Republic of China. 3 June 2011

<http://law.moj.gov.tw/>.

“Taiwanese  Debtors Repaying Regulation.” Laws & Regulations Database of The Republic of China. 3 June 2011

<http://law.moj.gov.tw/>.

“News”, Legal Aid Foundation. 15 June 2011

<http://www.laf.org.tw/en/index.php>.

 

"Taiwan’s Credit Card Crisis" Website linkage

http://sevenpillarsinstitute.org/case-studies/taiwans-credit-card-crisis

 


[1] After the credit card crisis, citizens and scholars pressured banks to followa business code of ethics. Under supervision from the government and from society, banks are more ethically conscious now. For example, E.Sun Bank established a moral rule that regulates the relationship between the bank and its employees. The bank trains employees on ethics. No single shareholder can have more than 3% of the banks’ shares. This rule prevents large shareholders from intervening in the duties of professional managers. E. Sun bank requires the company play fairly in the market.