Financial Compliance

Issues, Concerns and Future Directions

Maria Krambia-Kapardis

• Publisher: Palgrave Macmillan
• Year: 2019
• Print ISBN: 9783030145101
• eBook ISBN: 9783030145118
• Topic: Business
• Subtopic: Accounting
• Index: Business

This book explores the fundamental elements and risks that impact the compliance officer's work. Following a comprehensive understanding of the role of a compliance officer, by engaging with themes of compliance officers' liability, expectations, risks and effectiveness, it provides practical answers by leading academics and practitioners in the field.

This work also draws on how other areas, such as GDPR, financial regulation and whistleblowing, challenges on compliance officers and provides a way forward to convert these challenges into opportunities. The discussion of compliance challenges and practices in Australia, Europe and the United States provides critical insights into the development of compliance in today's financial environment. Financial Compliance: Issues, Concerns and Future Directions provides an invaluable working resource for academics, practitioners and a general audience interested in understanding and developing an effective compliance culture.

© The Author(s) 2019

Maria Krambia-Kapardis (ed.)Financial Compliancehttps://doi.org/10.1007/978-3-030-14511-8_1

Begin Abstract

1. Understanding Compliance with Laws and Regulations: A Mechanism-Based Approach

Anthony Bottoms^{1, 2}

(1)

University of Cambridge, Cambridge, UK

(2)

University of Sheffield, Sheffield, UK

Anthony Bottoms

Email: [email protected]

Keywords

Social mechanismsInstrumental complianceNormative complianceSituational complianceNielsen–Parker holistic compliance model

Anthony Bottoms

is Emeritus Wolfson Professor of Criminology in the University of Cambridge and Honorary Professor of Criminology in the University of Sheffield. He was also Director of the Institute of Criminology at Cambridge University from 1984 to 1998. His main recent interests in criminology have focused on compliance; desistance from crime; the legitimacy of criminal justice institutions; and penal theory. He is a recipient of the Sellin-Glueck Award from the American Society of Criminology, for international contributions to criminology; and of the European Criminology Award from the European Society of Criminology, for lifetime contributions to European criminology. He was elected as a Fellow of the British Academy in 1997 and was knighted in 2001.

End Abstract

1 Introduction

The purpose of this chapter is to lay some conceptual groundwork for later contributions in the book, by exploring and categorizing the reasons why people comply with laws and regulations. The focus of the discussion will, therefore, be upon what the sociologist Frank Parkin (1982: 79) once memorably described as compliance ‘as viewed from below’: that is to say, a ground-level look at how compliance occurs. By contrast, later chapters are—entirely properly—mostly concerned with how those who have a responsibility to enforce laws and regulations can achieve their ends with optimum efficiency and effectiveness—an approach that can reasonably be described as compliance ‘as viewed from above’. Despite their differences, however, these two types of analysis are in principle interconnected, because an enhanced understanding of ‘compliance from below’ (how and why compliance occurs) should enable enforcement agents to develop more sophisticated and effective compliance strategies.

In presenting this analysis in the context of a book whose main substantive focus is regulation in the field of business, I am very conscious that my own research career has concentrated on (in the clichéd phrase) ‘crime in the streets’ rather than ‘crime in the suites’. It follows that my examples are principally derived from my main field of study. However, some business examples are included, and some attention will also be paid to a leading strand of theorization about regulatory compliance, the ‘Nielsen–Parker holistic compliance model’ (Nielsen and Parker 2012; see also Parker and Nielsen 2011, 2017).

2 A Mechanism-Based Approach

The conceptual approach adopted in this chapter is based on the view that, when explaining social phenomena, we need to pay special attention to social mechanisms. In contemporary social science, an early advocate of this view was the social philosopher Jon Elster. He argued that ‘we will never have any general theory of collective action’, because the variety of potentially interacting motivations is ‘simply too large’ to be encompassed in such a theory (Elster 1989b, p. 205). That did not mean, however, that social scientific analysis is impossible. Rather, Elster concluded that social analysts should instead focus on ‘small and medium-sized mechanisms that apply across a wide range of social situations’ (p. 205), or, alternatively stated, ‘plausible, frequently observed ways in which things happen’ (p. viii). In focusing on mechanisms, he argued, we are also focusing on explanation: ‘To explain an event is to give an account of why it happened. Usually ….this takes the form of citing an earlier event as the cause of the event we want to explain…..[But this] is not enough: the causal mechanism must also be provided, or at least suggested’ (Elster 1989a, pp. 3–4).

Advocacy of the importance of social mechanisms in the explanation of social phenomena has subsequently been taken forward by a number of writers, and it has now burgeoned into a sub-field known as ‘analytical sociology’, with its own internal debates about key topics such as theories of action and causality (see, e.g., the collections of essays in Hedstrӧm and Bearman 2009a; Demeulenaere 2011a). For present purposes, it is not necessary to delve into these complexities, but it is important to outline some basic points about mechanisms as explanations. In doing so, I shall rely in particular on some writings by the Swedish sociologist Peter Hedstrӧm (2005; see also Hedstrӧm and Bearman 2009b), who is widely seen as having been particularly ‘responsible for the [systematic] theorization of [the analytical sociology] approach’ (Demeulenaere 2011b, p. 24).

At the beginning of his monograph on analytical sociology, Hedstrӧm (2005, p. 1) emphasizes the desirability of developing ‘precise, abstract, realistic and action-based explanations for various social phenomena’. This goal is of obvious relevance to this chapter, which tries to answer the explanatory question ‘why do people obey laws and regulations?’ In pursuit of his stated objective, Hedstrӧm (2005, Chapter 1) advocates a number of key features of sociological explanations, some of which I shall paraphrase here.

Firstly, then, explanations must be truly explanatory and not simply descriptive—that is, they must address the question why things happen. It is a commonplace of social science education that ‘a correlation is not a cause’, yet it is not always recognized that even advanced statistics are often simply correlational. Analytical sociology emphasizes that descriptions and correlations, although certainly valuable, are not enough; instead, in any given social situation it is crucial to ask the ‘why’ questions. Analytical sociology further argues that the best way of answering such questions is ‘by detailing mechanisms through which social facts are brought about’, also that these ‘mechanisms invariably refer to individuals’ actions and the relations that link actors to one another’ (Hedstrӧm and Bearman 2009b, p. 4, emphasis added). ¹ In the present context, the ‘why’ questions of interest are of course centred upon why, in a given social context, the level of compliance with a law or regulation is as it is (whether this be high or low, expected or unexpected).

Secondly, given the focus in analytical sociology on the actions of individuals (see the italicized phrase above), it is important also to emphasize that ‘sociology, as a discipline, is not concerned with explaining the actions of single individuals. [Hence] the focus on [individuals’] actions, is merely an intermediate step in an explanatory strategy that seeks to understand change at a social level’ (Hedstrӧm 2005, p. 5). Put another way, the overall strategy is to ‘explain why, acting as they do, [individuals] bring about [specified] social outcomes’ Accordingly, in our context, faced with a given level of compliance with a law, we need to explain how the actions of individuals are, in aggregate, producing that level of compliance. ²

Thirdly, since analytical sociology is not ultimately concerned with the actions of single individuals, it must to an extent rely on generalisations, and its analyses must therefore contain a degree of abstraction. However, analytical sociologists insist that in developing explanatory theories, researchers ‘must refer to the actual mechanisms at work’ and resist the temptation to build models of mechanisms ‘that could have been at work in a fictional world invented by the theorist’ (Hedstrӧm 2005, p. 3). ³ This realism is an important characteristic of analytical sociology. It is certainly also a helpful characteristic when one is seeking (as this chapter does) to analyse ‘compliance as viewed from below’ in a way that might be useful to people—such as compliance officers or police officers—who are facing real-life challenges in delivering effective and just compliance.

Finally, it is noteworthy that Hedstrӧm’s (2005) book is called Dissecting the Social—a title which he chose in order to emphasize that analytical sociology aims to ‘gain understanding by dissecting the social phenomena to be explained’ (p. 2). More specifically, in Hedstrӧm’s theorization, the term ‘to dissect’ means: ‘to decompose a complex totality into its constituent elements and activities, and then to bring into focus what is believed to be its most essential elements’ (p. 2). Taking this point together with the earlier ones, when analysing a given social situation a researcher should not only consider in detail the mechanisms in play among the people involved, she/he should also address the social relations in operation in that specific social situation (including the interactions of actors with differing mechanisms), in order to build an overall explanation of the social outcome.

In the present context, the implication of this approach is that we need to construct a typology of the principal mechanisms that, in the real world, sometimes cause legal compliance—or in other words, what Elster (1989b, p. viii) called the ‘plausible, frequently observed ways in which things happen’. In any specific situation where compliance is an issue, we will further need to consider how these mechanisms operate, given the social relations in play in that specific context.

One further issue must be addressed before we move on. The late Martin Hollis (2002), in his wonderfully clear textbook on the philosophy of social science, paid special attention to the existence of, and the potential tensions between, two major traditions in social scientific theorization, which he called, respectively, ‘explanation’ and ‘understanding’. The ‘understanding’ tradition is, unlike the explanatory tradition, primarily interpretative, and in its pure form, it proposes ‘that the social world must be understood from within, rather than explained from without…Instead of seeking the causes of behaviour, we are to seek the meaning of action’ (Hollis 2002, pp. 16–17). Hedstrӧm (2005), whose focus is firmly on explanation, shows only limited interest in the interpretative tradition, ⁴ but in my view, the best social science takes full account of both traditions and seeks to develop them in creative synthesis (Bottoms 2008). From this perspective, it is encouraging that within the field of regulatory compliance, there is a consensus that research in both these traditions has made important contributions to the field (Parker and Nielsen 2011, pp. 3–8). ⁵ While the present chapter focuses especially on mechanisms as a crucial tool with which to develop explanations of compliance, it endeavours to take full account of interpretative research that might help us to understand what ‘compliance’ means in specific situations—and to recognize that it might mean different things in different situations.

To illustrate the potential of a mechanism-based approach to explanation that also pays attention to interpretative issues, I shall first discuss an example of compliance processes in action, derived from a research project in which I was involved. After that, I shall turn to a full discussion of the main mechanisms of compliance.

Explaining Lower-Than-Expected Compliance: A Study in English Prisons

In the late 1990s, the minister responsible for English and Welsh criminal justice policy in the then UK government ⁶ decided to introduce a new policy for prisons in this jurisdiction known as the ‘Incentives and Earned Privileges’ policy (or ‘IEP’). The intention of the new policy, shortly stated, was to improve prisoners’ behaviour by linking prison ‘privileges’ (i.e. certain non-s...

Table of contents

• Cover
• Front Matter
• 1. Understanding Compliance with Laws and Regulations: A Mechanism-Based Approach
• 2. Legitimacy and Regulatory Compliance
• 3. The Uncertain Professional Status of Compliance
• 4. Compliance: From Soft Law to Hard Law—A View from France
• 5. Living with the New General Data Protection Regulation (GDPR)
• 6. Risk-Based Financial Regulation and Compliance Officer Liability
• 7. Whistleblowing: The Neglected Facilitator of Compliance
• 8. The Skillset of an Effective Compliance Officer
• 9. Disentangling the Expectation Gap for Compliance Officers
• Back Matter