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Building a Modern Risk Management Department Seminar

Financial Services Volunteer Corps (FSVC)January 19 – 22, 2009Tripoli, Libya

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Day Two

Period 12:25 to 12:45 PM

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Reputation Risk Management

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“It takes 20 years to build a reputation and five minutes to ruin it.”

And more recently

“You only learn who has been swimming naked when the tide goes

out…”

Warren Buffett Investor (and the richest person in the U.S.)

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Introduction: A Definition…… the risk to value arising from negative public or employee opinion.

Examples:•Negative Press•Diminished Brand Image•Public scrutiny•Ineffectiveness in handling customer dissatisfaction•Government dissatisfaction•Lack of trust

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2. Market 25% 51% 76%

3. Credit 25% 31% 56%

4. Regulatory 18% 40% 58%

5. Business 16% 54% 70%

6. Operational 14% 57% 71%

7. Technology 13% 40% 53%

8. Bus. Continuity 13% 37% 50%

9. Liquidity Planning 10% 40% 50%

10. Governance 7% 40% 47%

11. Political 7% 23% 30%

6. Reputation 22% 40% 62%

7. Liquidity Planning

19% 46% 65%

8. Governance 13% 41% 54%

9. Bus. Continuity 13% 37% 50%

10. Political 8% 31% 39%

11. Technology 8% 55% 63%

Greatest Major Total

Source: The Evolution of Risk Management in the Financial Services Industry – 2004 survey of executives from 134 institutions internationally by The Economist Intelligence Unity and PricewaterhouseCoopers.

Greatest Major Total

Threat to Market Value Threat to Earnings

1. Reputation 34% 41% 75% 1. Credit 37% 34% 71%

2. Market 31% 54% 85%

3. Regulatory 25% 40% 65%

4. Business 23% 54% 77%

5. Operational 23% 51% 74%

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Reputation Risk is Different When it’s a Matter of

National Reputation

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Anti-Money Laundering

Know Your CustomerKnow Your Transaction

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Holistic Self-Improving Process

(new)Due

Diligence (existing)

Customer Info File

(CIF)

Assessmentand

Reporting**

AMLSystemicScreening

TransactionHistory

File

Negatives

Positives

False Positive

Suspicious

Anti Money Laundering(including OFAC)

SAR

“Potential”(new)

Customers

Accept

NegativeFinding

(existing)

Decline (new)

EDD

Know Your Customer

*Periodic/Event driven: time period set by bank “rules” or by change in an element in reference databases (push vs. pull).**Assessment and Reporting for SARs and for other purposes need not be in one unit

Existing Customers*

SAR check

u

OFACScreening

Negatives

Positives

Government

Neutral & positive flows

Negative flows

Report

Process

File

Government

Legend

AbortTransaction

KYC DataStore

ExternalData

Repositories Know Your Transaction

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Elements

• Customer Information Profiles• Know Your Customer Screening

• Enhanced Due Diligence• Sanctions screening/ monitoring• Anti-Money Laundering Transaction Screening/Monitoring• Suspicious Activity Identification• Reactions• Feedback loop - Screening/ Monitoring Improvements & Improved

Target Marketing

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Major Risk Sensitive Indicators

• Geography

• Client Type

• Product/ Service Type

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Positive

(+)

Negative

(-)

False

Positive

False

Negative

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Need for Benchmarks

There is no generally accepted measure of the EFFECTIVENESS of Know Your Customer/Watch List Management/Anti-Money Laundering programs globally or even in major developed countries.

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Transparency International: Corruption Perceptions Index 2008

Finland

Denmark

New Zealand

Index 9.3

Sudan ChadHaitiIraqAfghanistanMyanmarSomaliaIndex 1.6 to 1.0

Population: 180

Tunisia # 62Index 4.4

Morocco # 80Index 3.5

Algeria # 92Index 3.2

Egypt/Niger #115Index 2.8

Libya # 126Index 2.6

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Transparency International’s Recommendations

1. “The OECD countries must step up enforcement of the OECD Anti-Bribery Convention's prohibition on foreign bribery and commit the necessary resources to monitor one another's enforcement”

2. “China, India and Russia should voluntarily adopt the provisions of the OECD Anti-Bribery Convention”

3. “Multilateral development banks must debar companies found guilty of foreign bribery”

4. “Companies must conduct due diligence when engaging in partnerships or acquisitions, and adopt and enforce strict internal no-bribes policies that include their agents, subsidiaries and branches”

5. “Developing countries should vigorously prosecute foreign companies found to have bribed on their soil, and must be supported in these prosecutions by the legal and financial cooperation of the host countries”