By Preetam Kaushik
The recent regulatory rap on the British banking conglomerate Standard Chartered by New York financial regulatory authorities has brought to the fore several issues that were under the radar until now. For one, it exposed how global banking giants (with HSBC and Barclays being reported earlier) subvert financial rules and regulations to suit their advantage.
Next, and of particular interest to the BPO industry, the scandal highlighted how the outsourcing of financial services operations, including oversight and compliance, to India can create a cozy relationship between corporate headquarters and the outsourcing subsidiary where both play hard and fast with the rules – thereby inviting the wrath of regulators. The point here is that outsourcing of financial services back office work does not automatically mean that the subsidiaries in the Indian BPO sector have to abide by whatever the parent company says.
When Courtesy to the Client Goes Too Far
More importantly, Standard Chartered, as indicted by regulatory authorities, was guilty of allowing dubious transactions pass through oversight and compliance via its Indian BPO subsidiary, thereby exposing a serious breach as far as internal fraud detection is concerned. This illustrates the fact that the Indian BPO sector generally treats customers like kings (as is usually the case with any world-class business service), and Indian providers extend this courtesy to risk and oversight as well.
Since compliance is a function where everybody has to be treated at arm’s length, the scandal is indeed a wakeup call for the Indian BPO sector in its dealings with foreign clients. There is little justification for processing shady transactions in the first place, and there is absolutely no justification for reneging on oversight and compliance functions. Indeed, it can be said that the Indian BPO provider for Standard Chartered that dealt with compliance is as guilty as its parent company of malpractice.
Another Reason to Hate BPO
Another aspect to the scandal is that it has given fresh ammunition to the anti-outsourcing crowd in the US and the UK, where this scandal is being seen as yet another downside to outsourcing of key functions. Coming at a time when the Indian BPO sector is trying to move up the value chain in terms of doing higher value-adding work, the scandal has dealt a blow to the reputation of the sector. Given the fact that the Indian BPO sector is already under scrutiny for other issues like client confidentiality and leakage of data, it is time for the outsourcing industry in India to take a fresh look at its operations and institute some “safe harbor” practices.
The media coverage in India to the scandal has been mixed, with some outlets calling for the Indian BPO sector to treat compliance and oversight in a way that would be worthy of the name, whereas other media outlets have questioned why the US regulators should single out the Indian arms when the instructions have come from the parent.
Lessons Learned
A nuanced reading of the situation would reveal that compliance is an aspect where the processing staffs have to act in the larger interests, rather than in the interests of the patron-client relationship alone. This is the stand that many respected commentators have taken, and this line of thought fits with what a compliance and oversight division ought to do in cases of conflict of interest. If there was a case for the Indian BPO sector standing up to the Western clients, this is the time, since there are gray areas here where the outsourcing client has clearly directed the Indian units on what to do but is now trying to pass the blame to them.
Finally, as part of its maturation process, the Indian BPO sector has to realize the responsibilities of processing sensitive financial transactions, and Indian providers can no longer claim they were directed or instructed to overlook questionable transactions. Worldwide, once scandals involving banks break into the open, it is the practice to question those who were responsible for detection as well as those who initiated them. Equal culpability is laid at the doorsteps of the processing staff as well as the internal fraud detection staff.
This is the key message that this scandal has for the Indian BPO sector and something that should serve as a warning for it going forward. As more news and details emerges about the scandal, the situation will crystallize and point to who exactly was to blame. As of now, the questions raised by New York regulatory authorities, though troubling need, to be answered by Standard Chartered without trying to shift the blame.
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