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Reputational risk - first it's one thing, then it's another and now it's both.

Nigel Morris-Cotterill

When I first started working in money laundering risk management in the early 1990s, reputational risk was something that greatly exercised my mind: surely customers would walk away from financial and professional service providers associated with laundering. That didn't happen.

Something else did.

A different form of reputational risk manifested itself: facts, suspicion, even rumour was passed between regulators who would coordinate (not combine) investigations producing multiple actions both within single countries and in multiple countries.

But that is changing: with the power of the hashtag and the unthinking millions riding bandwagons at the click of a link, social media is creating a fascinating and disturbing change.

Recently, Chinese "netizens" (who, for the most part, have little access to the internet proper and are more likely to be operating via Chinese chat platforms such as Weibo) have created waves of public noise that have resulted in apologies from a number of consumer companies. This month alone, three big brands "apologised" to "China" for causing upset. Each had been accused of some kind of insult against China.

Versace was first. It designed an advertisement for places where it has shops. There were city names and countries, such as "Milan, Italy." It also said "Hong Kong, Hong Kong." "China"'s 'net blew up. It should be "Hong Kong, China," said critics. Well, yes. Kind of. First, the correct national postal address for Hong Kong is.. Hong Kong. So there is a difference between that the political "Hong Kong, SAR China."

But it's more complicated than that because Hong Kong is made up of lots of districts, one of which is "Hong Kong." That district has lots of sub-districts which were once individual villages. Therefore Wan Chai (or Wanchai), Hong Kong is correct. Versace has a number of shops across what we might term "Greater Hong Kong" but what it calls its flagship shop is in Central - and Central is in that district that is called "Hong Kong" - that's even the name of one of its railway stations. Half a world away, it's as if Versace had put "New York, New York" on its advert. But it didn't: it put New York, USA (and several other American cities followed by USA." So it's clear that the pattern across the advert was City, Country. Then Versace printed the advert on a t-shirt and put it up for sale in China.

Nationalist feeling in China instantly took hold and Versace saw itself subject to huge numbers of calls for its products to be subject to boycott for the insult to China.

It was not the first: a shop brand called Coach made a similar advert and also printed it onto t-shirts but their "fault" was more subtle. Listing places such as "London, England" it listed "Hong Kong" and nothing else. That has also resulted in criticism. And then Givenchy did a "Hong Kong, Hong Kong" t-shirt. There were columns and the design contains the Hong Kong, Hong Kong entry alongside those for a number of Chinese cities e.g. Chengdu, China. The juxtaposition created a stark point, even if the designer wasn't trying to make a point.

All three companies have apologised, saying something like they deeply care for the feelings of "the Chinese people."

Across the world, hashtag campaigns on a variety of topics have forced companies to back down and to dismiss staff, often on the flimsiest of evidence or, even, unsupported allegations. The criticisms go far beyond the political with the ramifications of the "'#MeToo" campaign resulting in a ripple effect that has seen reputations destroyed by weak stories or, even, falsified statements.

So far, hashtag attacks on large financial services companies have not seen any significant impact: there have been, in particular, attempts originating in the USA to cause harm to the business of HSBC after findings that it was engaged in large scale money laundering for criminals in South America. But it has to be heeded as a risk: after 11 September 2001, Riggs Bank, was subject to investigation because of its extensive diplomatic banking services. While investigators looked at links to potential terrorist funding, they re-opened an old line of inquiry: the bank had willingly done large scale business with Panama's dictator, General Manuel Noriega. The investigation into the bank's involvement was focussed on his drugs trafficking money but the investigation was quietly disposed of by the orchestrated takeover of the bank by a much larger competitor. That was done just as investigators began to uncover evidence of US State Department (for which read CIA) involvement in rather more of Rigg's business than was good for it.

Reputational risk goes beyond the financial sector: for example, in the airline industry poor standards of cleaning are often seen as an indicator of cost-cutting which may also result in poor maintenance. Airlines that have a reputation for poor maintenance end up banned from flying across entire continents - as were all Indonesian airlines banned, for a while, from EU airspace.

The rapid spread of information, be it true or false, across millions of people for whom synthetic rage is their default state of mind results in considerable risk to reputation and, ultimately, business. As I said all those years ago, in financial services banks, in particular, have no assets except their reputation and a few buildings (often not even that, these days). If people don't think their money is safe, they will take it out. That's why there are runs on banks. The USA, with its system of banning foreign banks from the US financial system, can all-but destroy a bank anywhere in the world with a click of an enter key. As word of the ban gets out, customers queue to get their money back. And banks never have the liquidity to pay out all depositors. The tool that the USA uses is to name a bank as being "of primary money laundering concern." Very few banks survive and even less with their independence intact. Worse, the USA does not even have to achieve any standard of proof that would satisfy a court before it takes steps to try to kill a bank. The damage to its reputation is the means by which the USA achieves its ends.

It follows, then, that the risk that I originally identified all those years ago was not wrong, it was merely latent. It was a risk for which the time had not yet come. In the interim, the information network between regulators and, to a degree, prosecutors was developed and refined. Again, it's not only in financial services: the crisis in airbags caused the collapse of the world's largest producer. No longer is any form of malfeasance contained within a specific market.

Seemingly, the only products that appear to survive such problems are fashionable technology: no large number stops using Apple, Google, Samsung, Facebook no matter what faults or impropriety are uncovered.

As companies rush to issue apologies to the "trolls," the question has to be whether such public statements of contrition are actually feeding the frenzy where millions of people react to snippets of information and do not look at the full story before joining calls to action.

There is a clear cultural shift. Should it be embraced or resisted? Should companies say "sorry" or tell critics to grow up? Or is there a middle ground?

The fact is this: reputational risk is real and very complicated.

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