“Fraud prevention at banks: the limitations of the bad apple approach”

Misconduct by bank traders could persist as a problem if fraud cases are treated as the actions of an individual ‘bad apple’. Improving the team climate is what is really needed to reduce the likelihood of fraud. This is according to psychologists Wieke Scholten (until recently Behaviour & Culture Supervisory Officer at De Nederlandsche Bank/DNB) and Naomi Ellemers (Distinguished Professor of Utrecht University) in an academic article. 

The article by Scholten, Head of Audit for Culture at RBS in London from November, and Ellemers is published in Journal of Financial Regulation and Compliance. Entitled Bad apples or corrupting barrels? Preventing traders’ misconduct, it is partially based on interviews and observations made as part of the supervisory process at various Dutch and European banks.

Bad apple

In cases of fraud, banks often depict the perpetrator as a bad apple. Most banks believe that their eradication will solve the problem. Scholten: “That approach means that there is no further investigation of the conditions that enabled this misconduct. It is also why these kinds of fraudulent practices continue to happen at banks.” As long as banks cling to the ‘bad apple theory’ and act accordingly, misconduct by traders will remain a persistent problem. “The removal of a single fraudster does not solve the problem. The overall team culture plays a major role in misconduct by a trader.”

Combating unethical conduct

Using a socio-psychological model, dubbed the ‘Corrupting Barrels Model’, that outlines how misconduct emerges and is perpetuated within teams, the psychologists present tips on combating it in their article. According to Scholten, improvements to the team climate reduce the likelihood of unethical conduct. “In the team, you need to investigate how traders and managers handle mistakes made, whether there is a culture of envy caused by pay inequality or favouritism, and whether team members are actually aware of the moral implications of their activities.”

Psychology and banks

Much is known about patterns of behaviour in teams and their associated effects. The DNB Governance, Conduct & Culture centre of expertise specialises in applying social and organisational psychology in supervising the financial sector. The article by Scholten and Ellemers is the result of cooperation between DNB, Leiden University and Utrecht University. Scholten is completing her PhD on this subject.

More information
Martijn Pols, De Nederlandsche Bank press information: +31 (0)20-5242272, m.p.pols@dnb.nl
Ronnie van Veen, Faculty of Social and Behavioural Sciences press information, +31 (0)30-253 4027, r.a.b.vanveen@uu.nl