NEW YORK: International Mone­tary Fund chief Christine Lagarde called on Thursday for prosecution of individuals in the financial industry for misconduct, saying fines against firms alone were seen merely as a “cost of doing business.”

Lagarde said that holding individuals accountable for wrongdoing would be an important way to raise ethics standards in the financial services sector, whose reputation has been hammered by repeated scandals and misconduct.

“Despite evidence of actual malfeasance in several cases, it has been mostly corporate balance sheets that have borne the brunt of legal sanctions for reckless behaviour — not individuals,” Lagarde said at a workshop on reforming bank culture at the Federal Reserve Bank of New York.

“In fact, sanctions directed at financial institutions have come to be perceived simply as a ‘cost of doing business,’ which calls for adequate provisioning,” she said, according to her prepared text.

The IMF managing director cited estimates that large banks in the US and Europe had been hit with a combined $230 billion in fines over the last six years, only about 1.5 years of average net income of a group of global systemically important banks.

“A good place to start to strengthen personal accountability is criminal and civil liability,” she said.

“The sheer exposure to potential criminal liability acts as a deterrent. Indeed, criminal liability is never easy to prove, yet, if evidence of misconduct exists, justice should not shy away from seeking criminal and/or civil penalties at the individual level.”

Beyond criminal liability, an individual, when appropriate, should also face civil penalties and disciplinary actions such as professional disbarment, she said.

“Such changes can provide the right set of incentives for ethical behaviour and deter malfeasance through intentional misconduct as well as reckless risk-taking.”

Lagarde welcomed a recent shift by regulators to hold individuals accountable for their action. She cited a case in Iceland where top executives guilty of misconduct were prosecuted, and in New York the potential for parties found guilty in court to be banned from their profession.

She emphasised that a crackdown on personal accountability was in no way a condemnation of risk-taking.

Published in Dawn, November 6th, 2015

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