Bank on IntegrityA Practical Guide for Bank Managers
This Guide is jointly developed byIndependent Commission Against CorruptionThe Hong Kong Association of BanksThe DTC Association1
Points to Note in Using this GuideDescriptions and explanation of legal requirements under the Prevention of BriberyOrdinance and other relevant ordinances/laws in this Guide are necessarily generaland abbreviated for ease of understanding. Users of the Guide are advised torefer to the original text of the relevant ordinances/laws or seek legal adviceon particular issues where necessary. The ICAC, the organizers and WorkingGroup of this Guide will not accept any responsibility, legal or otherwise, for anyloss occasioned to any person acting or refraining from action as a result of anymaterial in this Guide.Case scenarios are used in this Guide to illustrate the legal requirements andcorruption risks and to highlight the lessons learnt. While they are drawn up basedon actual corrupt practices, each case scenario is hypothetical and does not meanto refer to any particular case or relate to any particular company or person.The advice and tips given in the Guide are by no means prescriptive or exhaustive,and are not intended to substitute any legal, regulatory or professionalrequirements. Users should refer to the relevant instructions, codes and guidelinesissued by the relevant authorities as well as by their employers as appropriate, andapply appropriate practices that best suit the operational needs and risk exposuresof their companies and business environment.Throughout this Guide, the male pronoun is used to cover references to both themale and female. No gender preference is intended.The copyright of this Guide is owned by the ICAC. Interested parties are welcome toproduce any part of this Guide for non-commercial use. Acknowledgment of this Guide isrequired.2
CONTENTSINTRODUCTIONPART1PART2PART3LEGAL REQUIREMENTS AND STANDARDS OF BEHAVIOUR1.1 Legal Requirements71.2 Standards of Behaviour12LEGAL AND INTEGRITY ISSUES AND LESSONS LEARNT FOR BANK MANAGERS2.1 Lending – 5 case scenarios192.2 Customer Portfolio Management – 3 case scenarios392.3 Sales – 2 case scenarios492.4 Procurement and Contract Administration – 1 case scenario55GOOD INTERNAL CONTROL PRACTICES AND ETHICS IN MANAGEMENT3.1 Good Internal Control Practices3.2 Integrity Management3.3 Making Ethical Decision – The ETHICS-PLUS Decision Making ModelPART435SERVICES AND ASSISTANCE4.1 Independent Commission Against Corruption4.2 Commercial Crime Bureau, Hong Kong Police Force4.3 Joint Financial Intelligence Unit4.4 Hong Kong Monetary Authority4.5 Securities and Futures Commission4.6 Industry Associations596669717273737475
ATTACHMENTS12Sample Code of ConductSample Probity Clauses in Contracts to be Awarded34The ETHICS-PLUS Decision Making Model
INTRODUCTIONGood corporate governance practices and a robust banking system arelinchpins to Hong Kong’s success in being one of the most importantinternational financial centres in the world. Businessmen, depositorsand investors worldwide bank on the high integrity standards and wellestablished system and control in our banking sector. To sustain thiscompetitive edge and achieve healthy growth, we must be vigilant inupholding the high integrity standard, not only by constantly remindingourselves of the standard that we should adhere to, but also constantlyupgrading ourselves to meet the expectations of our customers, businesspartners, and community.This Guide aims at providing a user-friendly as well as informative referencefor bank managers and practitioners to enhance their awareness of theanti-corruption laws applicable to their business environment; the actualand potential risks of corruption involved; and advice and tips on how bankmanagers and practitioners may help their banks prevent corruption.5
PART16LEGAL REQUIREMENTSAND STANDARDS OFBEHAVIOUR
To ensure compliance with and adherence to a high standard of integrity, and avoid pitfallsof corruption in carrying out the banks’ business, bank directors and employees should havean understanding of the relevant legal and probity requirements. The following providesa gist of the relevant provisions of the Prevention of Bribery Ordinance (Cap. 201), otherordinances and codes of conduct.1.1Legal Requirements11.1.1Prevention of Bribery Ordinance (Cap. 201) (POBO) – Section 9Bribery in the private sector is governed under this provision. Directors, managers and staffof a bank should have an adequate understanding of the provision, so as to avoid and helpavoid potential breaches of the law by themselves, their staff and agents. The following isgist of Section 9 of the Ordinance, its key elements and some examples relating to a bank’senvironment.(a)Section 9 – Corrupt Transactions with Agents Section 9 (1) - It is an offence for an agent to, without reasonable excuse, solicit oraccept an advantage as an inducement to, or reward for, his doing or forbearingto do any act, or showing or forbearing to show favour or disfavour to any person,in relation to his principal’s affairs, except with his principal’s permission. Section 9 (2) - Any person who offers an advantage to an agent for the abovepurpose also commits an offence. Section 9 (3) - Any agent who, with an intent to deceive his principal, uses anyreceipt, account or other document which contains any statement which ismisleading or false or defective in any material particular and in respect of whichthe principal is interested, is guilty of an offence. For example, if a bank staffknowingly uses false documents/inflated valuation reports on loan collaterals tofacilitate a customer’s loan approval with intent to deceive the bank, he may havebreached Section 9(3), even if he has not accepted an advantage for his act.17The full text of the ordinances can be accessed through the Department of Justice’s Bilingual Laws Information System website(http://www.legislation.gov.hk/index.htm).
(b)Principal The principal is the employer or any authorized persons of the employer. For abank staff or director and in relation to the bank’s business affairs, the bank isthe principal.(c)Agent An agent is a person acting for the principal. A bank’s director or employee is anagent of the bank in carrying out the bank’s business.(d)Advantage An advantage includes money, gift, discount, commission, loan, offer ofemployment, service, etc. Entertainment, defined as the provision of food or drink (e.g. a free businessmeal) provided for consumption on the occasion and any other entertainmentconnected with, or provided at the same time as, such provision (e.g. a showor performance provided at the venue where the meal is provided), is not anadvantage under the Ordinance.(e)Principal’s Permission2 If the advantage is accepted with the principal’s permission3, then neither theagent nor the offeror commits an offence. The permission refers to permission by the principal of the recipient of theadvantage. The permission of the offeror’s principal for him to offer theadvantage is irrelevant.82Staff of a bank are subject to more stringent requirements under the Banking Ordinance (Cap. 155) in relation to the acceptanceof advantage. See subsequent section of this Guide for situations when there is no defence of the bank having agreed to theacceptance of the advantage concerned under the Banking Ordinance.3In the context of this Guide, the principal is the bank, for which decisions including permission for staff to accept advantagescan normally be made by the Board of Directors (e.g. through policy or Code of Conduct endorsed by the Board) or personswith appropriate authority to make such decisions (e.g. the CEO) or explicitly delegated with authority to make such decisions (e.g.the policy/Code may have delegated the authority to give permission in exceptional cases to the Human Resources Director).
The permission must be given before the advantage is offered, solicited oraccepted. In any case where an advantage has been offered or accepted withoutprior permission, the agent must apply for his principal’s permission as soon asreasonably possible.(f)Custom Constitutes No Defence It is not a defence to claim that an advantage accepted or offered is customary inany profession, trade, vocation or calling.(g)Acceptance and Offer The advantage does not have to be actually/physically received by the agent foran offence to be committed. The agent/offeror commits an offence when heagrees to accept/offer the advantage. The agent commits the offence if he accepts the advantage for himself or foranother (e.g. for his spouse or any social, professional body he is a member of),and if another person accepts it on his behalf (e.g. the advantage is received byhis spouse on his behalf).(h)9Penalty A person convicted of an offence under Section 9 of the Prevention of BriberyOrdinance is subject to a maximum penalty of seven years’ imprisonment anda fine of HK 500,000.
1.1.2Prevention of Bribery Ordinance (Cap. 201) (POBO) – Section 4 andSection 8In addition to dealing with customers or business sector partners, directors and staff ofa bank may come across occasions where they have to deal with public servants. Theyshould therefore be aware of the following provisions which prohibit the offering ofadvantages to public servants in relation to business dealings.(a)Section 4 – Bribery It is an offence to offer an advantage to a public servant as an inducement to,or reward for, or on account of the public servant’s performing or abstainingfrom performing any act in his official capacity; assisting, favouring, hindering, ordelaying any person in the transaction of any business with a public body. Examples of public servants include staff of the Hong Kong Monetary Authority,Securities and Futures Commission, Stock Exchange of Hong Kong Ltd. which arepublic bodies.(b)1.1.3Section 8 – Bribery of Public Servants while Having Business Dealings withPublic Bodies It is an offence to, while having dealings with a government department or publicbody, offer any advantage to an officer of the government department or apublic servant employed by the public body.Banking Ordinance (Cap. 155) – Sections 123 & 124 It is an offence for any director or employee of a bank to ask for or accept advantagesfor his own personal benefit, or for that of his relatives, for showing favour to anyperson when approving loans or credit facilities from the bank. There is no defense ofthe bank having agreed to the acceptance of the advantage concerned (Section 124). Bank staff is prohibited from committing deliberate deception by making false entry ofdocumentation in relation to the bank's business (Section 123).10
1.1.4Other Relevant Ordinances/LawsOffences under the following ordinances/laws are sometimes associated with corruption.Directors, managers and staff of a bank should be aware of the risk exposure.(a)Securities and Futures Ordinance (Cap. 571)Part XIII of the Ordinance prohibits insider dealing in relation to listed corporationsand other market misconduct such as false trading, price rigging, marketmanipulation, etc. in securities or futures trading. As many banks provide wealthmanagement services, the managers and staff involved should be aware of therelevant provisions and restrictions when providing trading services to clients, andresist any corrupt offers or requests for undue favour.(b)Anti-Money Laundering and Counter-Terrorist Financing(Financial Institutions) Ordinance (Cap. 615)Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405)Organized and Serious Crimes Ordinance (Cap. 455)United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575)These ordinances set out offences relating to money laundering and the obligationsof financial institutions in customer due diligence and reporting of money launderingactivities. As bank managers and staff frequently assist customers to handle theirfunds (e.g. remittance), they should be aware of the relevant provisions, and resistany corrupt offers or undue requests.(c)11Personal Data (Privacy) Ordinance (Cap. 486)This ordinance protects privacy with respect to personal data. As banks collect andmaintain large amount of personal data of customers which may have commercialvalue to other parties, bank managers and staff should take note of the restrictionsin using personal data and resist any corrupt offers or undue requests in relation tocustomer data.
1.1.5Criminal Law of the People’s Republic of China – Articles relating toBribery4The Criminal Law of the People’s Republic of China prohibits the acceptance/offering ofbribes by/to private company/enterprise employees and the offering of bribes to Statefunctionaries or State organs, State-owned enterprises, Institutions, etc. Due to theincrease in cross-boundary business activities, staff of banks in Hong Kong may need totravel to and carry out duties in the Mainland. They should therefore be aware of the antibribery provisions under the Criminal Law of the People’s Republic of China5.1.2Standards of Behaviour1.2.1Code of ConductThe expected standards of behaviour of banks and their staff are set out in the statutoryguideline on Code of Conduct6 in the Supervisory Policy Manual issued by the Hong KongMonetary Authority (HKMA). The guideline has set out the minimum standards which theHKMA expects the banks to adopt, and requires every Authorised Institution to develop itsown Code of Conduct to set out the standards of behaviour expected of its managementand employees. A gist of the elements that are particularly relevant to corruptionprevention is highlighted below:(a)Ethical ValuesStaff are expected to follow ethical values in conducting business which shouldinclude honesty, integrity, diligence and accountability.124Regarding the Mainland legislation, please visit the following websites:Ministry of Commerce of the People’s Republic of China: www.mofcom.gov.cnSupreme People’s Procuratorate of the People’s Republic of China: www.spp.gov.cn5Readers may refer to "Business Success: Integrity & Legal Compliance Corruption Prevention Guide for SMEs in Guangdong,Hong Kong and Macao" published jointly by the ICAC and the Guangdong Provincial People’s Procuratorate, the extract ofwhich can be assessed on the ICAC website (www.icac.org.hk), or a request for the publication can be made online or via anyICAC Offices.6The full text can be accessed through the Hong Kong Monetary Authority website on pdf
(b)Personal BenefitsStaff should not solicit, accept and retain personal benefits from any customer of thebank or any individual or organization doing or seeking to do business with it, exceptwhere permitted within the criteria set out in the Code of Conduct. They should alsoactively discourage customers from offering personal benefits of any kind, includingany type of gift, favour, service, loan, fee or anything of monetary value.(c)Conflicts of InterestStaff should avoid situations that may lead to or involve a conflict of interest, actualor potential and, in case of doubt, seek the advice of the designated officer of theirbank.(d)Granting CreditStaff with lending authority should have specified limits that commensurate with hisrank or function according to the bank’s credit policy.No staff member should grant credit to himself, his relatives or companies in whichhe or his relatives have a personal interest.13(e)Receiving CreditNo staff member or his relatives should borrow or receive credit from third parties ona favoured basis or on terms other than at arm’s length unless previously approvedby the bank.(f)Conduct When Obtaining BusinessNo staff member should offer any bribe or similar consideration to any person orcompany in order to obtain business for the bank.
(g)Use of InformationStaff should handle carefully information relating to customers to ensure compliancewith relevant statutory requirements and common law on customer confidentiality.They should not release customer information to a third party without writtenconsent of the relevant customer.(h)Personal InvestmentsNo staff member should deal in the shares or other securities of any listed companywhen possessing privileged or price-sensitive information that is not generally knownto the shareholders of that company and to the public.(i)Outside EmploymentStaff should obtain prior written approval from the bank before taking up anydirectorship, employment or part-time commercial duties (paid or unpaid) outside thebank.(j)Reporting ResponsibilityA staff member should be alert to matters which could give rise to fraud, deception,theft, forgery, corruption or other illegal activities. If they reasonably suspect that anillegal activity is being perpetuated, they should immediately report it to the bank.Failure to report such activity immediately may result in disciplinary action.For banks’ Code of Conduct officers: A sample Code of Conduct provided by theCorruption Prevention Department of the ICAC to private companies for reference tohelp them refine their company codes of conduct is at Attachment 1. The CorruptionPrevention Department also offers advice on codes of conduct compiled by privatecompanies, including banks, with regard to corruption prevention.14
1.2.2Other Relevant GuidelinesRegulators and industry associations issue guidelines to banks from time to time. Bankmanagers and staff should be aware of the relevant guidelines in carrying out the bank’sbusiness.15(a)Hong Kong Monetary Authority (HKMA)The HKMA issues guidelines7 on various activities carried out by the banks in HongKong, including guidelines on prevention of money laundering.(b)The Hong Kong Association of Banks (HKAB) and the DTC Association (DTCA)The HKAB and DTCA have also jointly issued the Code of Banking Practice8 for theirmembers in dealing with their daily operations with customers. It specifically coversbanking services such as current accounts, savings and other deposit accounts, loans,overdrafts and card services.(c)Securities and Futures Commission (SFC)The SFC has issued a Code of Conduct for Persons Licensed by or Registered with theSecurities and Futures Commission. General Principle (GP1) “honesty and fairness”under this code sets out the anti-bribery guidelines for a licensed or registered personand requires him to be familiar with the POBO. The SFC is also guided by this Codeof Conduct when considering whether a licensed or registered person satisfies therequirement that he is fit and proper to remain licensed or registered.7Available on HKMA’s website ines-and-circulars/guidelines/).8Available on HKAB’s website (http://www.hkab.org.hk/) and DTCA’s website (http://www.dtca.org.hk/cop.asp).
(d)916Insurance Agents Registration Board (IARB)Bank employees marketing and selling insurance products are registered with andsupervised by IARB (set up by the Hong Kong Federation of Insurers (HKFI)). Theboard has to be satisfied that these employees are fit and proper persons9 (e.g.whether subject to any order of the court for fraud, dishonesty or misfeasance) andmeet other requirements specified in the Code of Practices issued by HKFI with theapproval of the Insurance Authority.Readers may refer to paragraph 58(d) & (f) and paragraph 80(l) of “Code of Practice for the Administration of InsuranceAgents" issued by the Hong Kong Federation of Insurers. Full text can be accessed through the HKFI website athttp://www.hkfi.org.hk/pdf publications/e CodePractice 2010.pdf
PART2LEGAL AND INTEGRITYISSUES AND LESSONSLEARNT FOR BANKMANAGERS
This Part, through hypothetical case scenarios which are drawn up based on actual corruptpractices, illustrates the relevant POBO provisions and highlights the risks of corruptpractices in a banking business environment. It not only provides lessons learnt on areaswhere bank managers should increase their awareness and apply good control practices,but also reminders for managers and frontline staff to help them defend themselves againstcorruption pitfalls and temptation. When other legal requirements are involved in a casescenario, they will also be mentioned.The case scenarios are grouped into the following four typical banking activities, showingthe risks of corruption or malpractice in different business functions.Lending (5 case scenarios) – refer 2.1Customer Portfolio Management (3 case scenarios) – refer 2.2Sales (2 case scenarios) – refer 2.3Procurement and Contract Administration (1 case scenario) – refer 2.4The activities, potential offences1 and risks highlighted in the above cases are for illustration only andare by no means exhaustive.118These are meant to illustrate the major points of law under the POBO & other possibly related regulations based on the factspresented in the case scenarios. Whether an offence is committed in an actual case of a similar scenario depends on the meritsof the case.
2.1Lending – 5 Cases2.1.1 Lending Case 1 –Bribery for Loan Extension21A Corporate Clientholds a loan at aBank. He runs intocash flow problemand cannotservice the loanrepayment.3 The Senior Bank Manageragrees, and endorses theextension when it is withinhis authority or makesfavourablerecommendationsto the Bank whenit is outside.5 Client gives expensivegifts such as watch,cigars, etc. and cashto the Senior BankManager.19The Client asks the Senior BankManager to secure extension ofhis due date a couple of times,with a promise to reward thelatter.4 The Bank grantsextension asrecommended.
Potential OffencesThe Senior Bank Manager, being an employee (agent) of the Bank (the principal)and without the permission of the Bank, agreed to assist the Client to secureextension of the latter’s loan (an act in relation to the Bank’s business) in returnfor advantages as rewards, contravened Section 9(1) of the POBO. The offencewas committed when he agreed to the offer even though he had not received therewards or actually provided any assistance. The Client contravened Section 9(2)of the POBO when he offered the advantages to induce the manager to give himthe favour.The Senior Bank Manager might have also contravened Section 124 of theBanking Ordinance.Lessons LearntCorruption RisksFor efficiency, bank managers are often delegated with authorities to endorsecertain loan-related applications up to certain limits. The risk of corruption is inproportion to the discretion bank managers are allowed to exercise. The greaterthe discretion, the higher the corruption risk.The restructuring of distressed loans is a corruption-prone area easily overlooked.A desperate debtor could entice the bank manager to secure favourable creditterms for him, e.g. extension of credit facilities.20
Good Control PracticesDesirably, separate credit approval authority from staff who deal directly withcustomers.If certain delegation is deemed unavoidable for operational efficiency, ensure thelimit is not excessive having regard to the staff’s rank, and conduct appropriatesupervision, spot checks and independent assurance check based on riskmanagement on such cases. The delegation/limit should be tightened further forhigher-risk customers.Exercise the same vigilance and independence in the approval of the restructuringof existing loans, as that of new credit facilities.Monitor credit performance of loans through exception reports/computer-aidedauditing, and build in technical controls in the system to alert the managementon exceptional/irregular cases as necessary, e.g. identify irregularities like repeatedextensions of repayment due dates and the approving bank officers involved; limitthe number of extensions; and assign the case to another bank staff for processingwhen the number of extension exceeds the number permitted.21
Reminder Against Pitfalls of CorruptionWhen a customer is willing to bribe for favour in credit approval, it reflects boththe underlying financial problems of his business and his poor integrity. His chanceof defaulting repayment will be high. An internal review of the case will unearththe impropriety and corruption dealing.The offeror may not be the only person in his company who knows about thecorrupt dealing, and the bank staff has no knowledge of or control over whoknows. People who know (e.g. the offeror’s business partner, staff) may reportthe crime for various reasons (e.g. subsequent breaking up of relationship with theofferor).With a stringent control mechanism of a bank, the loans are subject to audit/assurance checks. Thus there is a good chance that the corrupt dealings will bedetected.Once the staff accepts the bribe, he will probably face further requests from theclient to the extent that he is unable to entertain.Corruption in the lending function will result in an increase in bad loans, affectingthe bank’s business and profitability. Ultimately the bank staff himself wouldsuffer.22
2.1.2 Lending Case 2 –Bribery during Site Inspection1A Factory Ownerapplies for creditfacilities securedby new productionequipment.3 The Senior CreditManager and theCredit Manager findthe equipment oldwhen conducting theinspection.623The Senior CreditManager accepts thegift and submits afavourable report tothe Bank.2 The Bank instructsSenior CreditManager andCredit Manager tovisit the factory atGuangdong.4 The Factory Ownerrequests a favourand offers expensivewatches to bothcredit managers.7 The CreditManager takesthe gift, butreports theincident to theBank on thefollowing day.5 The Senior CreditManager signals theCredit Manager toaccept the gift.
Potential OffencesThe Senior Credit Manager, an employee (agent) of the Bank (the principal),without the permission from the Bank, accepted an advantage (a watch) fromFactory Owner as a reward for turning a blind eye to the old equipment andgiving him a favourable site inspection report (an act in relation to the Bank’sbusiness). Although the acceptance took place outside Hong Kong, some of theacts took place in Hong Kong (e.g. submission of a favourable report to the Bank).Hence, Senior Credit Manager contravened Section 9(1) of the POBO. TheFactory Owner contravened Section 9(2) of the POBO.Senior Credit Manager might have also contravened Section 124 of the BankingOrdinance.Although Senior Credit Manager is the supervisor of Credit Manager, he didnot have the authority to permit the latter to accept the advantage.Lessons LearntCorruption RisksIt is very common for banks’ corporate clients to have their business operationssuch as production plants or other assets in the Mainland or elsewhere outsideHong Kong. When site inspection/visit by bank staff is required in assessing a loanapplication, the staff are exposed to significant risk of temptation, which couldcomprise bribes, gifts, and excessive entertainment or services.In the scenario above, had the Senior Credit Manager been assigned to make thesite visit alone, the corrupt dealing might go undetected.24
The assignment of staff of the same unit to conduct the high-risk task wasconducive to corruption, in particular as one was the supervisor of another. TheCredit Manager did not turn down the offer on the spot probably because of thepressure from his supervisor, and could eventually collude with the latter.Good Control PracticesAs far as practicable, assign more than one staff members to conduct site visitsin higher risk cases, and they should preferably be of different units (e.g. onebeing the subject bank officer, the other a credit department officer) to avoid thesituation of a subordinate being “pressurized” by his supervisor to act in collusion.Educate staff that when an advantage has been accepted without prior permission,he must apply for the permission of or report the case to the bank as soon asreasonably possible.Provide an independent, trustworthy and confidential channel for reportingmalpractice, and encourage staff to report any suspected corruption to the ICAC.To enhance accountability, require site inspections to be documented with photosof the sites and assets concerned, as far as possible.Require submission of purchase invoice of the assets to verify the age and value,and require updated independent assessment report as far as practicable.Conduct random independent audit/assurance review on higher risk cases, e.g. sitevisits done by a bank staff member alone.25
Although some business/transactions need to be conducted outside Hong Kong,as far as practicable, ensure some important/key processes (e.g. submission/approval of credit proposal) are carried out in Hong Kong.Communicate to customers, in particular non-local customers, the bank’s antibribery stance and acceptance of advantages/entertainment policy, with emphasison zero tolerance to corruption involving staff.Reminder Against Pitfalls of CorruptionDue to the cultural background, some customers from other regions may regardthe offering of gifts/rewards for assistance provided or favour shown as a commonpractice. It is NOT necessary and NOT appropriate for the bank staff to adopt andfollow their culture, as this is in breach of the POBO.The offeror may mislead the bank staff to believing that the POBO is not breachedwhen the gift is accepted outside Hong Kong. Bank staff should be aware that as some of their work in relation to a case (e.g. submission of proposal/recommendation to the bank) will take place in Hong Kong, the POBO stillapplies to their acts in handling the cases; this is a question of integrity, irrespective whether it is in breach of the POBO ornot; and they should follow the code of conduct issued by the bank.Considerations under Lending Case 1 are applicable in this scenario.26
2.1.3 Lending Case 3 –Bribery and Collusion with Third Party for Favour inMortgage Loan Application2 The Property Developer applies fora lo
bank staff or director and in relation to the bank's business affairs, the bank is the principal. (c) Agent An agent is a person acting for the principal. A bank's director or employee is an agent of the bank in carrying out the bank's business. (d) Advantage An advantag e includes money, gift, discount, commissio n, loan, offer of