by Rushworth M. Kidder

HONG KONG

Last week, when Iceland’s chief financial regulator told an audience of anticorruption officials that “fraud and corruption are heading for the North Pole,” he wasn’t being merely metaphoric.

Tracing the impact of the global recession on his country, Gunnar Andersen, director general of his nation’s Financial Supervisory Authority, zeroed in on October 2008. That’s when, in a single week, Iceland’s three top banks collapsed.

As their losses mounted to $182 billion, markets in Reykjavik dropped 76 percent. Given a national population of only 320,000 people, he said, Iceland’s implosion was “the equivalent of 300 Lehman Brothers going bankrupt” in the United States. Had such a thing happened in the United States, he noted, “it would have needed 290 TARPs [the Troubled Asset Relief Program enacted by Congress in October 2008] to protect against the collapse.”

Iceland’s loss was the worst endured by any nation during the recent recession. Listening to Andersen, I expected that, as the new broom appointed last spring to help clean up the mess, he would be urging broader regulation and tougher legislation. Instead, painting a grim picture of the greed and cronyism underlying this collapse, he called not only for changes in the law but for a “change in attitude.” What went wrong in Iceland, he concluded, “has little to do with the regulatory framework.” Instead, it was a matter of “serious and massive fraud,” to be addressed not so much by rules as by values.

Frankly, that caught me by surprise. Fighting corruption typically centers on legislative, investigative, prosecutorial, and judicial efforts. But last week, at a three-day conference cosponsored by Hong Kong’s Independent Commission Against Corruption (ICAC) and OLAF, the European Union’s Anti-Fraud Office, something else was afoot. To be sure, there was plenty of talk about legal measures. But there also was an unmistakably strong focus on ethics and values, articulated not by social activists or global academics (not one of whom was on the roster of speakers) but by the cops, regulators, auditors, bankers, and judges who actually fight corruption on a daily basis. Here’s a sampling:

• Richard Alderman, director of the Serious Fraud Office in the United Kingdom, called for “a modern, ethical, anticorruption culture in business.”
• Ng Peng Khian, chief audit officer of the Bank of China, argued that “good corporate governance cannot rely solely on regulation” but needs “strong ethical culture” as well.
• Timothy Flynn, chairman of KPMG International, insisted that the first line of defense against corporate corruption “is to make sure we create highly ethical cultures grounded in integrity.”
• François Vincke, chair of the Anti-Corruption Commission of the Paris-based International Chamber of Commerce, observed that “compliance and integrity are a good investment.”
• Akere Muna, vice-chair of Transparency International’s board of directors and former president of the Cameroon Bar Association, noted the importance of whistle-blowers, whose motivation is “very much related to personal ethics.”

All of which fits well with the work of the ICAC, widely regarded as the world’s premier anticorruption agency. Back in 1995, ICAC started its own Ethics Development Centre to help educate business leaders on the topic. Prior to the conference, I sat down with ICAC’s commissioner, Dr. Timothy Tong Hin-ming. He’s well placed to comment on an organization that, during the past 35 years, has taken this former British colony from one of the most corrupt jurisdictions in the world to one of the cleanest.

Over tea in his agency’s new Centre of Anti-Corruption Studies, Dr. Tong pointed to a shift in ICAC’s efforts. As they expand beyond political corruption into private-sector investigations, they’re also showing increased interest not only in offenses that are specifically “indictable” (his word) but in those that are more broadly unethical. What troubles him, he told me, was the number of executives in Hong Kong public companies who had “attempted to take advantage of the financial tsunami — people who had helped cause the crisis, but what they did could not be brought under the enforcement umbrella because it wasn’t illegal.”

“We take such offenses very, very seriously,” he said, “because if we don’t, how can we claim to be the world’s financial center?”

How, indeed? What draws people to invest in a financial center is trust, a quality that can’t be legislated and enforced but must be valued and earned. The recession has exposed deep levels of corruption, and tighter regulation is in the offing. But the real remedy, according to these experts, appears to lie not in more compliance but in the creation of ethical business cultures.

As U.S. regulators busy themselves building new layers of enforceable regulation, they need to pause for a moment to listen to the message from Hong Kong. Regulate, yes. But remember that beyond the enforceable lies the broader realm of integrity. Build cultures of integrity, and you finally address the corruption that was an undeniable factor in creating the ethics recession.

©2009 Institute for Global Ethics

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