Give Your Second Line Real Power to Stop a Deal a Top Revenue Producer Wants

An internal warning reaching the right person is not necessarily the same as an internal warning being acted upon, particularly when the person raising the concern has less institutional influence than the revenue producer whose transaction may be affected.

A major financial-crime enforcement case illustrates this governance issue and raises a question worth examining within large institutions:

Does the compliance and risk function have genuine authority to challenge or stop a transaction supported by a senior, high-performing revenue producer, or does that authority exist primarily on paper?

Where Real Authority Needs to Sit

Any escalated concern involving a senior banker or high-value client relationship should be reviewed by an independent committee or decision-maker who is outside that individual's direct reporting line.

This helps reduce the possibility that the person assessing the concern has a direct interest in the commercial outcome.

Escalations should also be documented through to resolution, including:

• What concern was raised
• Who reviewed it
• What evidence was considered
• What decision was reached
• Why the decision was made

For transactions above a defined revenue threshold, this documentation becomes particularly important.

A verbal discussion that a concern was raised provides limited evidence of how the issue was handled.

A dated record showing the concern, review, evidence and decision provides a much clearer control trail.

Risk and compliance personnel should also have appropriate protection when escalating concerns involving significant revenue producers. That protection needs to be understood in practice, not simply included in a policy.

Repeated concerns involving the same client relationship should be assessed collectively rather than treated as completely separate events.

Multiple individually dismissed concerns may, when viewed together, indicate a broader pattern requiring further review.

A Relationship That Outran the Controls

Between 2009 and 2014, a major financial institution underwrote three bond offerings for a sovereign investment fund and earned approximately $600 million in fees.

According to U.S. enforcement authorities, the transactions involved a bribery scheme exceeding $1.6 billion.

Internal concerns regarding individuals connected to the transactions and characteristics of the fund were raised during the underwriting process.

A subsequent regulatory action found that a senior executive had failed to escalate certain internal warnings concerning the relationship, although the executive was not criminally charged.

The institution ultimately reached settlements involving several billion dollars, substantially exceeding the fees originally earned from the transactions.

The individuals involved also faced significant criminal and professional consequences.

The case demonstrates the potential consequences when commercial relationships, internal escalation processes and compliance concerns do not operate independently enough to ensure that significant warnings receive appropriate consideration.

The Question Worth Asking About Your Biggest Fee

The relevant question is not whether commercial teams and compliance teams will sometimes disagree.

They will.

The more important question is:

When they disagree, who has the authority to make the final decision, and is that decision-making process sufficiently independent?

A strong second line is not simply expected to identify risk.

It should have a credible mechanism to escalate, challenge and, where appropriate, prevent a transaction from proceeding until the relevant concerns have been properly considered.

Sources

U.S. Department of Justice, 2020 enforcement resolution.

Federal Reserve regulatory enforcement action, 2020.