Assessing Reputational Risk: A Four Point Matrix

Abstract

Corporate strategies have been increasingly confronted with the need to measure and manage corporate reputation. Despite the importance associated with measuring and assessing reputational risk, the effectiveness of techniques that accomplish these tasks have not kept pace

Full text

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ASSESSING REPUTATIONAL RISK:
A FOUR POINT MATRIX
Ezelda Swanepoel*
North-West University
Jánel Esterhuysen#
North-West University
Gary van Vuuren+
North-West University
Ronnie Lotriet**
North-West University
Received: November 2016
Accepted: January 2017
Abstract
Corporate strategies have been increasingly confronted with the need to measure and manage
corporate reputation. Despite the importance associated with measuring and assessing reputational
risk, the effectiveness of techniques that accomplish these tasks have not kept pace – perhaps due to
a lack of a universally accepted definitions or inadequate tools. This paper proposes a reputational
measurement matrix to measure and assess reputational risk nationally and internationally for the
purposes of closing the current reputational assessment gap. The matrix comprises four key aspects
(‘who’, ‘where’, ‘what’ and ‘how’): each assesses the degree of risk posed to reputation. Each of the
aspects of the four-point matrix will be evaluated via a template termed a ‘reputational heat map’.
The objective is to examine the numerous factors that influence a bank’s reputational risk. A retail
bank, used to determine the effectiveness of the implementation, was found to exhibit a high-quality
jurisdiction with elevated levels of international compliance. From the ‘who’ and ‘where’ perspective,
no clear evidence of reputational risk was indicated; for the ‘what’ and ‘how’, minimum reputational
risk was detected. A suggestion is made to invest in IT systems to strengthen financial institutions'
knowledge of their clients.
Keywords
Corporate reputation, reputational measurement matrix, reputational risk, KYC, retail bank.
_______________________________
*Dr E Swanepoel is a lecturer in the School of Economic and Management Sciences, North-West University, Vanderbijlpark,
South Africa. [20429258@nwu.ac.za]
#Dr J Esterhuysen is a research fellow in the School of Economic and Management Sciences, North-West University,
Potchefstroom, South Africa.
+Prof G van Vuuren is an extraordinary professor in the School of Economic and Management Sciences North-West University,
Potchefstroom, South Africa.
**Prof R Lotriet is a professor in the School of Business and Governance, North-West University, Potchefstroom, South Africa.

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1. INTRODUCTION
The most valuable asset in the capitalist economy is not cash, stock or buildings, but trust
(Harrison, 2008). This was the case when banks competed with each other to disperse their un-
backed notes among an ill-protected public (Barth, 2009). It is even more the case today, with
large volumes of assets churning though international financial markets faster than legal
confirmation can be provided. Thus, although a shortage of cash can bring a company to its knees,
it is more frequently a loss of reputation that deals the final blow (Economist Intelligence Unit,
2005).
If trust is present in stakeholder relationships and if it is reciprocated, it can be an important
driver of improved company performance. It is based on a set of collectively held beliefs with
reference to a company's ability and willingness to satisfy the interests of various stakeholders
(Dowling, 2006 and Helm, 2007) and should thus be viewed as a stakeholder's evaluation of a
company over time, as a socially shared impression, or a consensus regarding a firm's behaviour
in any given situation (Dubinsky, 2008). Corporate reputation affects the way in which various
stakeholders behave towards an organisation, which can influence employee retention, consumer
satisfaction and consumer loyalty (Chun, 2005).
A good reputation encourages shareholders to invest in a company, attracts and retains talent,
limits personnel turnover and correlates with superior overall returns (Chun, 2005; Helm, 2007 and
Sarstedt et al., 2013). However, business reputation grows and strengthens only as a reflection of
the company's relations with key stakeholders. A poor reputation signals that disaster lurks, and
that when it strikes, those companies will be incapable of weathering the storm (Conference
Board, 2007). Once reputation is compromised, the process of rebuilding it may be costly and
lengthy and in worst-case scenarios, reputational capital (a function of benefits gained and costs
avoided) may never be recovered. The maintenance or increase of reputational capital is apparent
from the increase in productivity provided through better leveraging of stakeholder relationships
(Young & Hasler, 2010 and Lizarzaburu, 2014).
Since reputation and managing reputation are essential, reputational risk has emerged as a
significant issue in corporate studies (e.g. Power et al
.,
2009). This increase in significance can,
in part, be attributed to an increase in competition, the development of global media or
communication channels as a disseminator of reputationally-sensitive information and customer
power and their readiness to switch suppliers (Economist Intelligence Unit, 2005). Even as the
importance of reputational risk management continues to increase, most companies do an
inadequate job of managing their reputations in general and the risks to their reputations in
particular. They tend to focus on handling the threats to their reputations that have already
surfaced. This is not risk management; it is crisis management – a reactive approach whose
purpose is to limit damage (Eccles et al., 2007). It is curious, then, that while tools and techniques
proliferate for managing monetary risks, the art of protecting reputations is poorly developed and
understood.
Reputation is a primary asset of most organisations, yet reputational risks have increased since
the credit crisis (2007/9), possibly because it is harder to manage than other risks. Protecting and
maintaining a good reputation it is one of the risk manager's most difficult tasks (Economist
Intelligence Unit, 2005). Given the importance of reputational risk, a comprehensive definition
emphasises the difficult task facing managers in their attempt to mitigate it. Lizarzaburu (2014)
defines reputational risk as the possibility of loss or decline in the reputation of an organisation

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in a way that adversely affects the perception that the social environment has on it, and to be an
effect of direct or indirect loss in the value of a company.
This work introduces a reputational risk assessment technique comprising four key points, each
forming the basis against which reputational risk can be assessed both locally and
internationally. The key matrix co-ordinates (who/where/what/how) together form a
reputational ‘assessment tool kit’.
This risk assessment technique can be used in any institution, but financial institutions provide
the focus in this work principally because of the R20bn fine imposed on six major international
banks (Bank of America, Royal Bank of Scotland, HSBC, Citibank, JP Morgan and UBS) for rigging
foreign exchange rates just two years after they were caught rigging the world's most important
interest rate, LIBOR (Damon & Grey, 2014). Financial institutions' reputation and the management
thereof not only impact the vast majority of individuals, but also because so much damage has
already been done (Treanor, 2014a). A good reputation can increase customer confidence in
products or advertising claims, and increase customer commitment, satisfaction and loyalty. It
is not surprising that maintaining and increasing corporate reputation has become a crucial
management objective for globally operating firms (Sarstedt et al., 2013). A reputational
assessment technique such as the one proposed here should enable a company to be proactive
and adequately track (and thereby improve) its reputation.
This work proceeds as follows: section 2 provides a literature study detailing previous work
covering reputation risk, while section 3 outlines the qualitative assessment of reputation risk.
Section 4 details the methodology employed in the assembly of the matrix and section 5 presents
and discusses the results obtained. Section 6 concludes.
2. LITERATURE REVIEW
Corporates are constantly confronted with the need to measure and manage corporate reputation
(Cravens & Oliver, 2006 and Sarstedt et al
.
, 2013). Since 2000, a rapid growth of evaluative and
standard-setting organisations – representing a new space of transnational governance – have
developed programmes to construct instruments and metrics for reputation that were developed
by employing factor analysis techniques (Power et al
.,
2009).
Reputation is increasingly being considered an organisational asset, which, therefore, can be
managed just like any other organisational asset. Reputation as an asset has increased in
significance for companies as sustenance for their competitive advantage: specific corporate
characteristics afford them a powerful distinction from their competitors (Sarstedt et al
.,
2013
and Casado et al
.,
2014). Management of a company's reputation and reputational risk should be
part of an effective risk management strategy and process. The activities and the communication
policy of a business gives rise to reputation, and can be a daunting and challenging task.
Reputational risk management is the management of factors that are a source of reputation
because reputation is, to a large extent, a perception which forms outside of the company
(Lizarzaburu, 2014; Okur & Arslan, 2014 and Van den Bogeard & Aerts, 2014).
Reputation is intangible and by definition vague and abstract, difficult to evaluate directly
(Vargas-Hernandez, 2013 and Koutsoukis & Roukanas, 2014).
Although managing reputational risk proves to be demanding, Loh (2007) opines that the key to
the effective management of reputational risk is to recognise that reputation is a matter of

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perception. Since reputation is perception, it is perception that must be managed (Okur & Arslan,
2014 and Van den Bogeard & Aerts, 2014). Reputational oversight should reach beyond what
management does to enhance the perception of the firm and create reputational wealth. Given
the risks that such an intangible asset is exposed to, the Board of Directors should consider
performing a corporate reputational risk management oversight function (Razaee, 2007).
This argues for the assessment of reputation in multiple areas, in ways that are contextual,
objective, and, if possible, quantitative. The company must evaluate its ability to meet the
performance expectations of stakeholders objectively: gauging the organisation's true character
is complex. The Chief Executive Officer cannot take sole responsibility nor delegate the
responsibility of managing reputational risk to any one individual (Eccles et al
.,
2007).
Organisations need more than just a Chief Reputational Officer to coordinate external affairs,
communication and public relations. It is necessary to establish a set of processes to encompass
the wide array of business risks the corporation is exposed to and to fully comprehend the manner
in which they affect the firms' public perception. These processes should aim to control any
potential damage to the corporations' image, not only by means of a communication strategy,
but also through a satisfactory response to any business risks which originate from reputational
failure (Atkins et al
.,
2006 and Conference Board, 2007).
Confusion relating to an exact definition adds to the confusion over measurement methods in the
reputational literature (Vargas-Hernandez, 2013 and Koutsoukis & Roukanas, 2014). However, a
number of measurement approaches are available which reflect the number of possible strategies
towards measuring corporate reputation (Klewes & Wreschniok, 2009). Even so, among the
measurement scales used to compare firms, many have been criticised as being overly focused on
the financial performance of companies, for using a single, uni-dimensional measurement item
or being over-focused on the view of a single stakeholder (Chun, 2005).
Reputation risk is understood as a strategy resource and a complex construct and it poses
measurement challenges both to those who aim to manage it and those who wish to study it. The
understanding and identification of reputational risk is significant: it cannot be assessed nor
identified if it is not wholly understood. Organisations are often embedded in media-friendly
external measures such as rankings and ratings, and their reputation poses distinctive
management issues (Power et al
.,
2009).
A way to assess reputational risk is by assessing its outcomes, directly, by looking at
organisational perceptions in the various shareholder groups (Koutsoukis & Roukanas, 2014;
Lizarzaburu, 2014; Okur & Arslan, 2014 and Van den Bogeard & Aerts, 2014). The approach adopted
by a firm depends on its background, school of thought or epistemological basis (Chun, 2005).
The measurement and management of reputational risk is complex in nature, so there are
numerous different opinions as to the most effective and efficient manner regarding its
assessment. Effective assessment techniques are important for researchers who seek to examine
its role as an antecedent, criterion, or moderating variable in different contexts. Models used in
the past to measure reputational risk include, but are not limited to, ranking measures,
reputational quotients, and identity measures.
2.1 Ranking measures
Ranking measures are among the most established measures of reputation and comprise ranking
by the media. Included in these media rankings are Fortune's Annual Surveys of CEOs, the Financial
Times' Most Respected Companies, Management Today's Most Admired Companies and Asia

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Business' Most Admired Companies. Respondents are asked to rate a competitor's reputation in
terms of attributes, although there are some differences in terms of the sample frame or items
used, the same criticisms of uni-dimensional operationalisation, using a single stakeholder's
views and financially focused criteria, are made (Chun, 2005; Sarstedt et al
.,
2013 and Zhu et al
.,
2013). In addition, Sarstedt et al
.
(2013) opine that these measures cannot capture all facets of
corporate reputation. A further point of concern is that these measures rely on single items to
measure constructs, which respondents likely perceive as heterogeneous.
It is generally held that abstract constructs require the use of multi-item measures, because most
constructs, by definition, are too complex to be measured effectively with a single item. In terms
of predictive validity, single items perform well: multi-item scales only under specific conditions.
Other authors (e.g. Davies et al., 2010) have observed that these measures are subject to a strong
financial halo effect (Chun, 2005; Sarstedt et al
.,
2013 and Zhu et al
.,
2013).
2.2 The reputational quotient (RQ)
The RQ is a quantitative approach that evokes the personification metaphor for assessing
corporate reputation. Among many metaphors, personification makes sense to individuals; it
allows them to comprehend a wide variety of experiences with non-human entities in terms of
human motivation, characteristics and activities. The RQ uses personality as a measurement tool
that can assess a firm's reputation. One advantage of the RQ is that it is validated for the
measurement of both image and identity, which allows for any interrelationship of gaps between
the two to be measured (Davies et al
.
, 2003; Chun, 2005 and Chun & Davies, 2006).
While researchers (e.g. Davies
et al
.
, 2014 and; Karabay, 2014) acknowledge that the RQ is
conceptually superior to ranking measures due to the inclusion of the emotional appeal factor,
its strong reliance on cognitive elements has been subjected to criticism. Among the criticisms
are the scale's overemphasis on rational elements, the lack of a rigorous conceptual definition
and the emotional appeal dimensions (Davies et al
.,
2004; Schwaiger, 2004; Porritt, 2005; Barnett
et al
.,
2006; Schwaiger et al
.,
2009 and Sarstedt
et al
.,
2013).
2.3 Identity measures
Identity is measured both as it
is
and as it
should be
using quantitative and qualitative
techniques, predetermined dimensions and inductive approaches. A few examples include work by
Van Rekom (1997), Balmer and Soenen (1999) and Gioia and Thomas (1996). A procedure for
measuring identity was introduced by Van Rekom (1997), who interviewed 25 employees as a first
step using the laddering technique. Applying this technique is limited to a small sample and the
identified characteristics were tested using a questionnaire survey. The results were compared
with a semi-structured laddering technique.
Balmer and Soenen (1999) developed the ACID test (Actual, Communicated, Ideal, Desired
Identity) of corporate identity management. The qualitative methods used include in-depth
interviews, desk research and content analysis to identify 15 corporate image "interfaces". To
measure the interface between actual and desired identity, a range of qualitative research
techniques such as interviews, observation, history audit and focus groups were recommended.
Gioia and Thomas (1996) explored the relationship between identity and image both from a senior
management perspective, using the triangulation method, which adopts both qualitative and
quantitative techniques. Initially a case study and in-depth interviews were constructed and nine

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factors were identified by theme analysis: region, type, ownership, size, information processing
structure, strategy, image, type of identity, and strength of identity. The relationship between the
nine factors were examined by a quantitative survey and tested through regression analysis.
This paper proposes the construction of a four-point reputational matrix. This technique focuses
on qualitative data from which assessment will be made. This paper aims to provide a conceptual
framework based on literature that could be used to measure reputation risk. This matrix may
prove to be superior, because focus is placed on individuals, processes, place and type of
business, factors which also help make the matrix more comprehensive.
The next section provides a more detailed discussion on the matrix used to assess reputational
risk.
3. MEASURING REPUTATIONAL RISK IN A QUALITATIVE MANNER
With regard to the validity and reliability, an audit in terms of Generally Accepted Auditing
Standards was not undertaken. The scope of the paper was limited to a review and analysis of the
documents and information provided during the course of the investigation. The validity of the
documents has not been verified, nor has the authenticity of the relevant records and documents,
other than the instances specifically indicated in this paper. The purpose of the reputational risk
assessment was to consider and analyse all the available documents, financial records and other
relevant information obtained during the assessment.
This section introduces four key elements (who/where/what/how) which collectively form a
matrix used to optimally assess reputational risk. Each key point's importance and validity is
examined. The current reputational assessment gap that exists is what this research seeks to close
by constructing a new manner in which reputational risk can efficiently be assessed.
3.1 The ‘Who’
The ‘who’ element concerns the risk that any counterparty may pose to reputation. Aspects to be
considered in assessing the ‘who’ include client profile, source of wealth, client intent and
underlying beneficiary owner (UBO). The objective is to enable a bank to form a reasonable belief
that it knows the true identity of each client, and establish, with relative certainty, the type of
transactions in which a client is likely to engage. In addition, this enables a bank to determine
when transactions are potentially suspicions. Banks are exposed to large numbers of clients, so it
is vital that banks have an understanding of the clients whom they bank. Fortunately, there are
numerous techniques available today (e.g. Know Your Client - KYC, internet searches and adverse
media screening), in order to aid in the identification of these clients. A bank should obtain
information, at account opening, that is sufficient to develop an understanding of normal and
expected activity for the customer's occupation or business operations. This may be based on
account type or customer classification and this information should allow a bank to differentiate
between lower-risk and higher-risk clients (Federal Financial Institutions Examination Council,
2010).
Higher-risk clients present increased exposure to a bank's reputational risk. These clients
together with the activities and transactions in which they engage should be reviewed
exhaustively at account opening and more frequently throughout the term of their relationship
with the bank. A bank may determine that a client poses a higher risk because of their business

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activities, ownership structure, anticipated or actual volume and types of transactions, which
include transactions involved in higher-risk jurisdictions (Federal Financial Institutions
Examination Council, 2010; Financial Services Authority, 2011 and LexisNexis, 2011).
When fraud in the financial sector is rampant, the robustness of a bank's on-board processes
become significant. Even at industry levels, fraud can damage a bank's reputation, customer
loyalty and shareholder confidence (Joyner, 2011; De Smet & Mention, 2011 and Wu & Wan, 2014).
A bank needs to incorporate a risk-based approach for customer acceptance which will enable
risk scoring and detection of potentially suspicions transactions. Sufficient information needs to
be gathered to assist the bank in appropriately allocating its resources to clients and transactions
that present a relatively greater risk of involvement in money laundering or terrorist financing,
and where necessary avoid any association with specific customer categories and/or transactions
(Mizuho Bank, 2013; Irwin et al
.,
2014 and Tsingou, 2014).
A recent example, which emphasises the importance of assessing this factor, was the recent US-
MENA Private Sector Dialogue held in New York in October 2014, which provided insight into current
trends in banking. It was stated that with the onset of new financial regulations banks need to
reassess and redefine their businesses. The failure of certain banks to conduct basic due diligence
on some of its account holders, assign appropriate risk categories and ignore warnings that
monitor systems which are not adequate, were also debated. The violation of KYC norms that
exposed banks to fraud risks were also under discussion. Certain banks failed to check and
monitor the relationships its corporate customers had with politically exposed people and failed
to identify high-risk transactions. Financial crimes have increased the penalties for banks and
also affected the reputational risks (Gulf Times, 2014).
The discussion continued to include AML initiatives to be used in order for financial institutions
to be successful. The key areas on which to focus include new account opening procedures,
sustained customer identification process, customer risk rating, enhanced due diligence and
transaction monitoring and reporting (Gulf Times, 2014).
3.2 The ‘Where’
Money laundering (ML) and terrorist financing are closely related to the effectiveness of anti-
money laundering laws (AML) and the efficient manner in which these laws are enforced. Banks
need to assess the prime location in which clients reside as well as trade (Mizuho Bank, 2013; Irwin
et al
.,
2014; Morris, 2014 and Tsingou, 2014). Concerns about offshore tax abuses and the role of
tax haven banks in facilitating tax evasion are longstanding.
Offshore tax evasions are of concern not only due to tax fairness and legal compliance issues, but
also because lost tax revenues contribute to a country's annual deficit (Bucovetsky, 2014 and
Levin, 2014). The financial crisis of 2007–2009 also revealed that tax haven structures and shadow
banking entities play a central role in the practice of financial institutions reliant on financial
innovation (Palan & Nesverailova, 2013 and Lysandrou & Nesvetailova, 2014).
Roughly half of the global stock of money is routed through offshore financial centres, many of
which are considered tax havens (Palan & Nesverailova, 2013). More recently, the global financial
crisis of 2007–2009 revealed the scale of the phenomenon of shadow banking (a complex network
of financial intermediation) that takes place outside the balance sheets of the regulated banks,
and thus remains invisible to the regulatory bodies. Recent estimates place the amount of
accumulated wealth registered in offshore havens at approximately $US21 trillion, or nearly 18%

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of aggregate global wealth. The figures for the shadow banking industry were estimated at $67
trillion at the end of 2011, and, as a result, the G8 and G20 have become increasingly vocal about
managing cross-border tax evasion, especially through tax havens (Palan & Nesverailova, 2013;
Adrian, 2014; Fiaschi et al
.,
2014 Levin, 2014 and Lysandrou & Nesvetailova, 2014).
ML is a process that transforms illegal inputs into supposed legitimate outputs and often involves
the abuse of financial institutions as instrumentalities. It broadly encompasses a wide range of
activities that may be involved in disguising the origin of proceeds of crime. These proceeds thus
represent an input to the process and the output is a pool of assets with an aura of legitimacy.
The laundering process may involve a series of transactions conducted in both the informal and
formal sectors. Any provider of a product or service that can be used to store or transfer value can
itself be abused as an instrumentality in the laundering process. This type of ML is commonly
associated with the business of the core financial sector, other financial business, business and
professions operating with links to financial sectors and other businesses (Dawe, 2013; Almond,
2014; Yeon, 2014 and Tsingou, 2014).
Money Laundering Risk (MLR) has recently been recognised as a serious risk endangering the
financial sector and society as a whole, and is drawing increasing attention in recent decades on
both regulation and supervision (Jia et al
.,
2013).
To appropriately apply the risk-based approach recommended in International Standards on
Combating Money Laundering and the Financing of Terrorism and Proliferation by the Financial
Action Task Force on Money Laundering (FATF) and efficiently allocate supervisory resources,
national supervisory authorities need to accurately assess the MLR levels of financial institutions.
MLR can be affected by many factors, including institution size, internal rules, and management
attitude (Jia et al
.,
2013; Othman & Ameer, 2014 and Tsingou, 2014).
Recent (2014) news of HSBC Holdings (HSBA)'s Swiss private banking unit being charged by
Belgian prosecutors for illegally assisting wealthy clients in the country avoid hundreds of millions
of euros in taxes, emphasises the importance of the ‘where’ aspect. The Brussels prosecutors'
office said the bank was suspected of "serious and organised" fraud, money laundering, criminal
organisation and acting as an illegal financial intermediary. More than 1 000 Belgian taxpayers
could be affected over amounts involving several billions of dollars that were invested, managed
and/or transferred between 2003 and 2014 (White, 2014).
Ideally, a bank should be situated in a country with high economic strength, political stability and
low levels of secrecy. If the quality of jurisdiction as a financial centre is high together with
international compliance, the location of the bank would not pose a threat to the bank's
reputational risk.
3.3 The ‘What’
The ethical obligations of the sellers of financial products are currently a matter of intense public
debate and lobbying (Angel & McCabe, 2012; Bowie, 2013; Sternberg, 2013 and Ferrell & Freadrich,
2014). Investment advice is planning the allocation of the wealth of the client in various financial
products. This includes advice relating to the purchase, sell or deal of investment products and
advice on an investment portfolio of various assets like stocks, bonds, cash, mutual funds or other
investment products. Investment advice can be written or oral or through other means of
communication which can benefit the client in the long run. The investment advisory problem can
be recognised as decision-making under uncertainty, including the understanding of personal

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attributes of the client and the allocation of suitable assets to the client's portfolio (Angel &
McCabe, 2012; Mitchell & Smetters, 2013 and Ghosh & Mahanti, 2014).
Catchphrases (in the language used in the banking products' sales) foment a positive outcome
despite the fact that there is no safeguard guarantee of clients' money. In addition, financial
institutions are aware of the legal liability that accompanies their claims, as is evidenced by the
lengthy paragraphs of fine print at the bottom of their web pages and printed materials (Bordt,
2014). In many instances, customers are treated legally according to the fine print in their
account terms and conditions, but if they are dissatisfied, this may be due to either
miscommunication or misunderstanding of these rules (Malinconico et al
.
, 2013).
An example which emphasises the importance of the ‘what’ was the recent admission by Barclays
that £5bn in Payment Protection Insurance (PPI) was mis-sold by the bank. Although Barclays was
not the only bank involved, it made provision for the largest PPI compensation. Other banks
include Royal Bank of Scotland (£3.3bn) and HSBC (£2.5bn) (Scuffham, 2014).
3.4 The ‘How’
Greed, self-interest or profit maximisation all contribute to an increase in ethical misconduct.
Sometimes greed becomes a fever of accumulation for gaining profit. When a client is paying for
the service, he/she has full right of loyalty and transparency from the institution, but bankers
recommend those investment plans to the client that maximise profits.
Service providers can be in close proximity to the client, which consequently can lead to a conflict
of interest. Clients should be treated equitably, and service dealing should not be based on
favouritism or the financial position of the client. To fulfil the assigned target or to get
recognition, officials often engage in practices to mislead the customer (Bowie, 2013; Sternberg,
2013; Ferrell & Freadrich, 2014 and Mittal et al
.,
2014).
Participants in the banking sector should adopt best practice and comply with rules. Any illegal
or unethical activity should also be discouraged. There should be independence, and the service
provider should not be biased by personal relationship, beliefs of other forms of compensation.
Risk and reward should be placed accurately so that the client can make a prudent decision and
the bank and client's secrecy should not be compromised for personal gain (Mittal et al
.
, 2014).
Another current (2014) example which emphasises the importance of the ‘how’ is the six major
banks (JPMorgan Chase, Citigroup, Bank of America, UBS, Royal Bank of Scotland and HSBC) who
agreed to pay more than $4 billion in fines to international financial regulators for manipulating
the multitrillion-dollar foreign exchange market. The six banks agreed to pay a total of $4.3 billion
to the US Commodity Futures Trading Commission (CFTC), the US Office of the Comptroller of the
Currency, the British Financial Conduct Authority (FCA), and the Swiss financial regulator FINMA.
The extent of manipulation is considerable: the foreign exchange market accounts for $5.3 trillion
in transactions every day—more than 20 times the size of the global stock and bond markets. The
total amount of the fines is nearly as large as the earlier LIBOR settlements, in which major banks
paid over $6 billion (Treanor, 2014b).
4. METHODOLOGY
Each of the aspects of the four-point matrix will be evaluated via a template termed a
‘reputational heat map’. Each of the four points has different aspects and criteria linked to it.

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From the data gathered, each aspect is assessed and rated as either having a high, medium or low
impact on a bank's reputation. Each aspect will have a focus area followed by the assessment and
findings thereof. The objective of this study is to examine the numerous factors that influence a
bank's reputational risk. In doing so, all available documents, financial records and other
relevant information obtained were analysed and a report was prepared based on the findings.
The data was obtained from a retail bank in South Africa to perform a reputational risk
assessment with reference to the clients that it services, the intermediaries it utilises (the ‘who’)
and the jurisdiction of Mauritius in which it operates (the ‘where’). The references also include the
products which they sell (the ‘what’) and the manner in which they do so (the ‘how’).
The assessment of the ‘who’, the ‘what’, and the ‘how’ was conducted on a South African bank;
however, because the South African bank uses Mauritius as a booking or trading centre, only the
‘where’ applies to Mauritius. The underlying reason for the assessment of Mauritius is due to it
being a common tax haven for many companies and it is considered a high-quality jurisdiction,
with high levels of international compliance. The Mauritius branch was contacted and asked to
complete two templates, which provided information on the customer base profile and included
generic questions regarding the source of wealth of the customer base. All relevant risk
assessment information was utilised; however, there is a possibility that not all documentation
was made available.
4.1 Template ‘who’
The template used to assess the ‘who’ aspect of the matrix consists of four categories to be
assessed under control deficiencies. These four aspects include know your client (KYC)
(controversial clients due to personal or professional activities clients), source of wealth (source
of wealth is controversial – gambling – or related to criminal activities – corruption – or non-
transparent), client intent (aggressive tax avoidance, hiding inappropriate sources of wealth or
assets from rightful claimants), and ultimate beneficial owner (UBO) (non-transparent
beneficiaries of assets i.e. anti-money laundering and sanctions).
De Smet and Mention (2011) argue that because financial institutions' solvency and reputation
can be impacted by the aforementioned aspects, all four of these aspects are interlinked. For
example, if the depositor's money is stolen it will forfeit its value on the balance sheet and harm
the reputation and integrity of the bank. The complementary aspects of know your client and AML
are considered to be the most important regulatory area within the private banking industry, and
clients do not want their bank to be directly involved in money laundering schemes. Doing so could
damage the reputation of the bank. In general the attention given to AML practices has increased
due to two assumptions: money laundering is a serious crime and the incidence of laundering must
be lowered though concrete international instruments. Once all four aspects have been assessed
by each business unit, which of the four aspects poses a risk to the banks' reputation may be
determined (Reuter & Truman, 2005; Geiger & Wuensch, 2007 and Alldridge, 2008).
TABLES 1 through 4 are only the templates for the collected and analysed data. The actual data is
depicted in TABLES 5 through 8. TABLE 9 concludes the four point matrix. TABLES 1, 3 and 4 are
used to assess the four aspects that are rated on a five-point scale. 1 indicates a low risk. 2 – low
to medium risk, 3 – medium risk, 4 – medium to high risk, and 5 – high risk. TABLE 2 used the inverse
five-point scale, where five indicated low risk and one indicated high risk.

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The in-scope business clusters were requested to complete two templates, providing information
on the customer base profile and generic questions around the source of wealth of the customer
base.
TABLE 1: Template of ‘who’ assessment of reputational risk
Control deficiencies
Know your
client
Source of
wealth
Client intent
Ultimate beneficial
owner
Business Unit 1
Business Unit 2
Business Unit 3
Source: Authors’ analysis
4.2 Template ‘where’
The template which determines the ‘where’ aspect of the reputational risk assessment consists of
seven individual factors, each to be assessed (for the purposes of this study) to determine the
possible risk it may pose to the bank’s reputation. The specific purpose of each important target
segment of the jurisdiction needs to be considered in addition to the financial centre and tax. The
strategic relevance to the said bank as well as public perception, financial strength, relevance,
and ease of doing business need to be taken into consideration in order to determine which aspect
of ‘where’ can be identified as a threat to the bank. Indices and previously conducted analysis of
the retail bank were used as a measure. With regard to quality and compliance, 10 separate
factors (see section 5.2) were assessed. TABLE 2 uses a five-point scale, where 5 indicates low
risk, 4 – medium risk, 3 – medium risk, 2 – medium to high risk and 1 – high risk.
TABLE 2: Template of ‘where’ assessment of reputational risk
Differentiating proposition
As a jurisdiction to clients in Africa
Location
Tax
Operational costs
Quality
Regulatory compliance
Track record
Ease of doing business
Source: Authors’ analysis
A detailed questionnaire was used to conduct a question and answer session with the retail bank
in Mauritius. Workshops with business representatives of the retail bank in Mauritius were
conducted. In addition, the bank was asked to complete two templates, providing information on

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the customer base profile and generic questions around the country specifically. The completed
templates make up the majority of our Where report. Furthermore, searches were conducted of
publicly available information and indexes.
4.3 Template ‘what’
The ‘what’ aspect includes assessing whether or not the bank sells appropriate products. This can
further be subdivided into two categories which will need to be assessed: these include the social
purpose of the products and the nature of the products. With regard to the social purpose, aspects
to be considered will include the commercial purpose of the product and the suitability of the
product given the client’s risk profile. There are two aspects to be assessed regarding the nature
of the product: whether or not the product is within the bank's recommendation capability and
whether or not the product is in line with regulatory expectations.
The findings upon which potential areas of risk were identified are documented. Each focus area
is ultimately assigned a risk level (1 – low risk; 2 – low to medium risk, 3 – medium risk, 4 – medium
to high risk and 5 – high risk).
Based on the findings and potential areas of risk each focus area was evaluated on a three-point
scale to ultimately determine the risk level. If the potential area of risk proved to be of very little
to no threat to reputational risk it received a value of one. If the potential area of risk proved to
be of medium risk or there was some room for improvement it received a value of two out of three.
Finally, if the potential area of risk proved to be high or detrimental to reputational risk, it
received a value of 3.
The in-scope business clusters were requested to complete two templates, providing information
on the customer base profile and generic questions around the products.
TABLE 3: Template of ‘what’ assessment of reputational risk
Focus area
Findings/
Assessment
Potential
risk area
Risk
level
Products
Suitability of products given client's risk profile,
objectives, mandate and level of sophistication
Products and services in line with regulators’
expectations
Are products and services within the bank’s capability to
appropriately recommend, monitor and manage?
Commercial purpose of products and services
Source: Authors’ analysis
4.4 Template ‘how’
The ‘how’ aspect is concerned with the assessment of the manner in which products and services
are being delivered. This can further be subdivided into two important categories, which will
assess the business practices and the systems and tools. In the assessment of business practice

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aspects, pricing incentives and the sustainability of these practices were taken into
consideration. With regard to the assessment of systems and tools two important factors were
analysed: reporting procedures and determining if the Management and Insurance (MI) practices
to manage risks are copacetic.
The in-scope business clusters were requested to complete two templates, providing information
on the customer base profile and generic questions around the practices.
TABLE 4: Template of ‘how’ assessment of reputational risk
Focus area
Findings/
Assessment
Potential
risk area
Risk
level
Engage in business practices that ensure sustainability
from the perspective of all stakeholders
Align interests between clients, bank, colleagues (e.g.
through pricing and performance measures)
Provide transparent, clear, accurate, and timely
reporting (internal and external)
MI that is inadequate to manage risks appropriately and
in a timely manner
Source: Authors’ analysis
5. RESULTS
5.1 Reputational Risk Assessment: Mauritius – Summary of ‘Who’
reputational risk indicators
TABLE 5: Data depicted in template ‘who’
Control deficiencies
Know your
client
Source of
wealth
Client intent
Ultimate
beneficial
owner
Wealth
1
5
5
5
Investment management
5
1
5
5
Insurance and financial advisors
5
1
5
1
Stockbrokers
5
1
1
5
Fund managers
1
1
5
1
Asset management and personal
clients
1
1
5
1
Source: Authors’ analysis

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In TABLE 5 the scores indicate which particular business unit views which control deficiencies as a
potential reputational risk, i.e. the wealth business unit indicated that it views source of wealth,
client intent and Ultimate Business Owner (UBO) as a highly risky potential source of reputational
risk.
Furthermore, it was also found that each of the business units has customers to be considered a
high-risk entry type. In addition, the wealth business unit indicated that it banks customers with
potentially high-risk sources of wealth. As such all of the business units were found to have a high
risk impact on reputational risk.
5.1.1 Know your client
The Mauritius branch completed a template on the profile of their customer base (yes, no, maybe)
and separate templates termed "private clients" and "customer profile". Three different sectors
were assessed: corporate, private and retail banking.
The completed templates indicated that Mauritius has one foreign national politically exposed
person (PEP) as a primary customer. Mauritius also has an unidentified number of PEPs as related
parties and Ultimate Beneficial Owners (UBOs), which include foreign PEPs, and it does not have
individuals as primary customers, but as related parties and UBOs, which also include foreign
nationals.
Mauritius has individual private banking primary customers, related parties and UBOs. Its
customer base includes foreign nationals (including South Africans). It has PEPs as primary
customers, related parties and UBOs (foreign PEPs, non-South African).
Mauritius has PEPs as primary retail banking customers (by shareholder structure), related parties
and UBOs (including foreign PEPs, potentially South African, even though not confirmed).
Mauritius also has unlisted companies, both foreign incorporated entities and entities with
foreign operations (including South African companies). Mauritius also has foreign and local
trusts (potentially South African), pension, retirement and Collective Investment Scheme (CIS)
funds, potentially including foreign funds. Mauritius banks companies owned by government
(including foreign companies), and charities/clubs/societies/non-governmental organisations,
including foreign entities as business banking clients. KYC posed a medium risk to the bank's
reputation.
5.1.2 Source of wealth
The management of the branch in Mauritius was provided with a template to complete, in order to
identify potential high-risk customer types, from a source of wealth perspective. From the
completed template it was assessed that the branch in Mauritius banks companies whose
ownership vests in bearer shares, casinos and gambling houses (not internet gambling), highly
cash-intensive businesses, arms manufacturer and nominee companies. The Mauritius branch
does not provide banking services for clients that are of extreme political or religious groups, nor
does it provide banking services to cults or persons/organisations engaged in the incitement of
racial hatred. Other excluded clients include those who operate in or are registered in a
sanctioned country, customers known to use child labour, customers known to have been involved
in terrorism, customers involved in pornography, animal testing/fur trade or shell banks. Source
of wealth therefore posed a low risk to the bank's reputation.

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5.1.3 Client intent
The data analysed to assess client intent included the data gathered from a retail bank in Africa
and was not limited only to the branch in Mauritius. Important aspects assessed included tax
avoidance, hiding inappropriate sources of wealth, or hiding any asset from its rightful claimant.
The majority of products provided by the retail bank (excluding wealth) are viewed as vanilla
products, which involve little structuring and are only offered in South Africa to local residents or
international clients who are permanent residents. This in turn limits the risk of these products
being used for tax avoidance. In addition, all new products undergo an extensive new product
approval process, and if a new product is found to be a potential reputation risk, the product is
referred to a reputation risk committee with senior representation for approval. All clients
undergo a robust on-boarding process to ensure there are no inappropriate sources of funds, or
no assets are hidden from their rightful claimant. Client intent thus posed a high risk to the bank's
reputation.
5.1.4 Ultimate beneficial owner
The objective was to identify potential reputational risk areas from an AML and sanctions
perspective. The Mauritius branch has one of the most stringent AML frameworks in place within
Africa and there are Economic Development Department (EDD) requirements in place for PEP
customers within the existing legislation. Sanctions screening was not a local regulatory
requirement as at date (2014); however, the Central Bank and the Financial Services Council (FSC)
regularly circulate the United Nations Student Association (UNSA) and Al Qaeda lists to all
Financial Intelligence (FIs) for implementation and action. All customers and respective related
parties are captured on the core banking system and sanctioned screened on a daily basis against
existing international and local lists as well as against updates to these lists. The Mauritius branch
complies with both the requirements of the specific retail banks' Group PEP policy as well as local
legislation, whichever is the most stringent. All staff members are provided with mandatory AML
training on an annual basis based on their job description; ad hoc training is also completed on
request. Adequate reference material for on-boarding of customers is also available to staff.
UBOs posed a medium risk to the bank's reputation.
5.2 Reputational risk assessment: Mauritius – Summary of "Where"
reputational risk indicators
The two templates completed by the Mauritius branch in addition to searches of publicly available
information and indexes indicated that the Mauritius branch’s jurisdiction should be rated as a
strategic jurisdiction for all the specific retail banks in Africa. The data also indicated that, other
than a transferring pricing issued that is being managed, no evidence of reputational risk exists
in Mauritius.
Mauritius is a politically, economically and socially stable jurisdiction. A review of the legal
framework and international co-operation indicates that Mauritius is a highly-regulated
jurisdiction both locally and internationally.
To obtain the final score of 4.15 (quality) and 4.20 (compliance), 10 factors were analysed and
given a rating out of five upon which the average was determined to produce the final score (see
FIGURE 1). A score of between 0.00 and 1.90 is an indication of low economic strength, political
instability, high secrecy and limited information sharing agreements; a score of between 4.00 and

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5.00 is an indication of high economic strength, political stability, low secrecy and full
information sharing agreements; a score of between 2.00 and 3.90 is an indication of a midway
point between the two extremes. The following factors were analysed:
Quality
 Economic strength driving standards of quality (GDP/capita);
 Access to skills and resources;
 Political stability of jurisdiction (World Bank governance indicators);
 Actual and perceived secrecy (financial secrecy index – tax justice network); and
 Global ranking as a financial centre (global financial centre index).
Compliance
 AML compliance to FATF standards;
 AML compliance to OECD standards;
 Double tax treaty (DTT) status;
 Information sharing status (e.g. TIEA and adoption of automatic exchange "Son of FATCA");
and
 Compliance with FATCA legislation.
TABLE 6: Data depicted in template ‘where’
Differentiating
proposition
As a jurisdiction to clients in Africa
Location
Excellent location to service clients
Tax
World leading tax-efficient county to reside in, Intergovernmental Agreement
(IGA) signed for Foreign Account Tax Compliance Act (FATCA) and 14 Deferred
Tax Assets (DTAs) signed with countries in Africa but not considered the main
reason for international clients to bank in Mauritius.
Organisation for Economic and Co-operative Development (OECD) ranks
Mauritius as only partially compliant in terms of tax transparency.
Operational
costs
Relatively low operational costs.
Quality
Overall quality as a financial jurisdiction is good and very high for Africa.
Regulatory
compliance
Overall good (IGA signed Dec 2013).
Strict South African exchange control creates arbitrage opportunity for
Mauritius to offer banking to International Corporates in Africa.
Track record
Across many indices ranked 1st in Africa, often ranked 2nd next to RSA and
Botswana.
Ease of doing
business
1st in Africa.

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Differentiating
proposition
As a jurisdiction to clients in Africa
Average
Good jurisdiction with moderate to high credit risk rating. Often used due to
preferential exchange control and highly regarded as a risk mitigating
jurisdiction.
Average score
Quality 4.15 and Compliance 4.2.
Source: Authors’ analysis
FIGURE 1: External jurisdiction assessment.
Source: Authors’ analysis
5.3 Reputational risk assessment: Mauritius – Summary of "What"
Reputational Risk Indicators
The research conducted on the ‘what’ element placed focus on service delivery, more specifically
the products. The specific aspects that were assessed included the suitability of the products
relative to clients’ risk profile; whether or not the products are in line with regulators'
expectations; whether the products are too advanced for the bank to provide advice on and the
commercial purpose of the products. These aspects were individually assessed, and all the
International compliance score
Quality of jurisdiction
1234 5
1
2
3
4
5
Medium risk –
consider relevance
of booking centre
High/good
Medium/average
Medium/average
Low
3.8
4.0
Medium risk –
consider relevance
of booking centre
Mauritius: rated as
3.8/4.0 score.
Considered a sound
jurisdiction, with
low reputation risk
Consider exiting
jurisdiction
High potential for
reputation risk

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aspects except the suitability of the products relative to clients’ risk profile, which received a
medium-risk rating, received a low-risk rating.
TABLE 7: Data depicted in template ‘what’
Area
Findings/assessment
Potential area of risk
Risk
level
Products
Asset products (Lending)
Liability products (Deposits)
Bancassurance
e-channels
Specific products are offered for the
on-shore and offshore markets
None identified – all tax
structure and complex
trusts terminated
1
Suitability of products
given client's risk profile,
objectives, mandate and
level of sophistication.
All products follow the New Product
Approval Process to ensure they are
appropriate for the market
A financial need analysis is carried
out to ensure all products are in line
with risk profile and understanding
of the customer
In Treasury (for plain vanilla
products) the RMs perform necessary
screenings and suitability tests as
well as credit assessment
Inherent risks in offshore
international banking,
managed through
regulatory framework
and management
processes.
2
Products and services in
line with regulators
expectations.
The NPA Process engages all the
relevant departments thus ensuring
the input of all functions and risk
mitigation on new products
The regulator is informed of any
changes. Bank of Mauritius regulates
all products and services
None identified.
1
Are products and services
within the bank’s
capability to
appropriately
recommend, monitor and
manage?
Simple vanilla banking products
which are easy to manage and
monitor
Offshore Corporate lending products
and Treasury are managed out of
Corporate and Investment Banking
(CIB). Domestic lending is managed
in-country.
None identified.
1
Commercial purpose of
products and services
No tax evidence or structuring
undertaken.
Trusts are not allowed to be
structured.
None identified.
1
Source: Authors’ analysis

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5.4 Reputational risk assessment: Mauritius – Summary of ‘How’
reputational risk indicators
The ‘how’ aspect was assessed by means of sustainable delivery, assessed by four categories.
These categories included business practices that ensure sustainability; the alignment between
the clients, the bank and colleagues; the provision of transparent, clear, accurate, and timely
reporting both internally and externally; and Management and Insurance (MI) that is inadequate
to manage risks appropriately and in a timely manner. Upon the review of the data, sustainable
business practices and MI received a rating of medium risk, while alignment and reporting received
a low-risk rating.
TABLE 8: Data depicted in template ‘how’
Focus area
Findings/assessment
Potential area of risk
Risk
level
Engage in business
practices that ensure
sustainability from
the perspective of all
stakeholders
Engage in business practices
that ensure sustainability
from the perspective of all
stakeholders
Rigorous KYC process. KYC aligned
with Know your customer anti
money laundering (KAML) policy
KYC process is thorough
NPA process takes into account the
treating customers fairly (TCF)
principles
Introducer policy has been
approved by Business Introducer
Committee (BIC) at Regional Level
and Group Introducer Committee
(GIC) at Group level in line with
Group Introducer Policy
2
Align interests
between clients, bank,
colleagues (e.g.
through pricing and
performance
measures)
Align interests between
clients, bank, colleagues
Introducers are used for new
businesses, but are government
regulated. Local management
companies provide administrative
services are remunerated by the
client.
All introducers have signed a
service level agreement (SLA) with
the bank, which contains all
banking charges (ABC) clauses; as
is the practice in the local market,
no referral fees are paid by the
bank to introducers.
1
Provide transparent,
clear, accurate, and
timely reporting
(internal and
external)
Provide transparent, clear,
accurate, and timely
reporting
Pricing is strongly regulated and
reviewed by the Financial Services
Commission (FSC).
There is no fee paid to introducers
by BBM.
Onshore and offshore clients have
different pricing structures.
1

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Focus area
Findings/assessment
Potential area of risk
Risk
level
Tariff guides are available on
website and branches for residents.
All terms and conditions are also
within facility letters a copy of
which is provided to the client.
MI that is inadequate
to manage risks
appropriately and in a
timely manner
MI that is inadequate to
manage risks appropriately
and in a timely manner
Compliance-related MI can be
improved as the extraction of UBO
Directors' positions on multiple
companies is not available.
2
Source: Authors’ analysis
TABLE 9: Four-point reputational risk matrix
Reputational
risk level
Findings
Risk rating
Overall risk rating
Who
KYC
Medium risk
3
3
Source of wealth
Low risk
1
Client intent
High risk
5
UBO
Medium risk
3
Where
Quality
4.15
1
1
Compliance
4.2
1
What
Products
Low risk
1
1.4
Suitability
Low / Medium risk
2
Expectations
Low risk
1
Capabilities
Low risk
1
Purpose
Low / Medium risk
2
How
Sustainability
Low / Medium risk
2
1.5
Interests
Low risk
1
Reporting
Low risk
1
MI
Low / Medium risk
2
Source: Authors’ analysis
6. INTERPRETATION OF RESULTS
Each of the four aspects (who/where/what/how) was evaluated separately based on predefined
sub-categories and possible level of risk posed to reputational risk. Each aspect had its own scale
or level of importance. The ‘who’ aspect proved to be the most significant. After the analysis a risk

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level was provided which indicated whether said factor was of high, medium, or low risk. For the
purposes of this study a retail bank was used in order to tests the hypothesis; however, any type
of financial organisation, nationally or internationally, can utilise this matrix to measure its
reputational risk or aspects which might pose a threat to its reputation.
From this study it was observed that the retail bank had a high-quality jurisdiction, with high
levels of international compliance. Mauritius can also be viewed as a preferred jurisdiction due to
risk mitigating motivations. The assessment of the ‘who’, the ‘what’, and the ‘how’ was conducted
on a South African bank; however, because the South African bank uses Mauritius as a booking or
trading centre, only the ‘where’ applies to Mauritius.
Mauritius (in terms of ‘where’) has single-borrower limits in Africa, which makes it an attractive
jurisdiction. The Mauritius branch also incorporates a rigorous KYC process and conducts internet
searches and adverse media screening when on-boarding clients. On the front of the ‘who’ and
the ‘where’ there is no clear evidence of reputational risk in Mauritius. In addition, there was no
evidence of tax structuring or tax evasion, so perceived secrecy appears to be unfounded.
Regarding the ‘what’ and the ‘how’ aspects, the assessment indicated that the Mauritius branch
sells vanilla products and all tax structuring and complex trusts have been terminated in
accordance with local regulation. The Mauritius branch’s domestic lending is managed in-
country. In addition, there are inherent risks in offshore international banking, but these appear
to be well managed through the regulatory framework and strong management processes. In
addition, no tax advice or structuring is undertaken and the regulator does not allow banks to
structure trusts. Introducers are used for new businesses, but are government regulated, and local
management companies provide administrative services and are remunerated by the client. To
further their reputational risk, it is proposed that they invest in IT systems to strengthen KYC.
7. CONCLUSION AND RECOMMENDATIONS
Risk profiles and client needs have to be thoroughly explored, and reviewed regularly in line with
suitability requirements for providing on-going advice. Stringent controls should be applied to
ensure that investment recommendations are unbiased, consistent with the house view, and in
line with the client’s risk profile / mandate. No unsupported products should be sold or held in
advisory and discretionary portfolios without appropriate communication and exception
documentation. No personal recommendations should be made to execution-only clients, without
exception from (1) tax/ trusts services provided only where there is a genuine commercial purpose
(2) are in line with Group Tax Principles, and (3) the client understands the risks. Finally, the retail
bank should offer straightforward trust structures with known settlor, predominantly holding
‘managed’ financial assets with no interest in controversial assets.
As mentioned throughout the paper, reputational risk is of extreme importance and the current
reputational gap that exists is what this matrix aimed to close. As the literature and the empirical
evidence shows, such a framework is not only comprehensive but is the first of its kind. In addition,
the matrix has been tested and has proven to be reliable; however, a limitation of this matrix was
the commitment of the test subject, the retail bank.

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