What is a Bank Compliance Program?

Since the past 40 years, both, the Compliance Regulatory environment and the Financial Services environment have evolved. Regulations address the complex financial services environment that has continued to evolve since the Bank Secrecy Act (BSA) was first enacted in 1970. It now relies to a large extent on fast-paced, anonymous transactions within a globally intertwined financial system. Anti-Money Laundering and Countering the Finance of Terrorism (AML/CFT) compliance requirements have created a marked increase in cost and complexity to global banks due to an increase in reserve capital requirements. While on one hand, the regulatory changes have increased the resilience in financial systems and helped battle financial crime, on the other hand, they have also put increased pressure on banking relationships and cross border financial networks. Orders for correction in action, prosecution agreements, and harsh financial fines issued by regulators, correspondent banks have responded by limiting their activities to markets with more acceptable regulatory risk-reward economic benefits.

Bank regulatory compliance has resulted in a disproportionate increase in costs and implementation challenges, heightened by the impact of the withdrawal of the corresponding banking relationships. Within trade lines and remittance channels, there has been a concentration of flows, undermining banks that are local and critical for financial sector stability. Upgrading a bank compliance program can put financial institutes in a stronger position to maintain or grow their network, serve better to their customers and provide to the global economy. Continuous improvements in compliance in financial institutions pervade the global financial system, it is important to:

(i) be aware of the business implications of ML/FT along with implications for security and criminality

(ii) recognize additional compliance requirements for participating in the global financial system

What is Compliance in Banking?

It takes a while for banks to figure out what specific controls are required to address regulatory requirements. This leads to a build-up of labour-intensive control activities with uncertain effectiveness. Most banks still struggle with the basic understanding of compliance literacy, accountability, performance incentives, and risk culture. This causes a dramatic increase in compliance and control spend with limited or unproven impact on the residual risk profile of a bank. An effective bank compliance program calls for a sufficient number of experienced resources that can support the bank’s compliance function to better identify, measure, monitor, control, and report on ML techniques.

  • A well-versed bank compliance program can mitigate the risk faced by a correspondent bank in doing business if it’s located in a high-risk jurisdiction and can bring the overall residual risk to a level acceptable to the correspondent banks.
  • Obtaining and retaining the Credit Bureau Report (CBRs) enables the bank to provide offshore banking services to high-value banking customers.
  • If satisfied with the Customer Due Diligence (CDD) standards, the correspondent bank will likely be receptive to providing payable-through-accounts services.

The downside of not having an effective compliance program in financial institutions can result in enforcement action from regulatory officers that include large fines, heightened regulatory scrutiny, pressure on the bank’s funding and liquidity, civil and criminal liability of the board of directors/senior management/other employees and even reputational damage.

To find better, more effective ways to execute business processes by compliance, here are a few different methods:

  • Integrating regular enterprise compliance-risk assessments such as facilitated workshops to assess inherent risk exposures and how they affect business processes
  • A formal business-change-management process that flags any significant operational changes, be it the volumes, products, workflows, footprint, and systems
  • In case of quantitative measurement for measurable risks – risk markers for any of the risks harder to quantify, a common inventory of risky outcomes, scenario analysis and forward-looking assessments

Establishing a Risk Management Framework in Financial Institutions

Bank compliance risks can affect multiple risk categories, including liquidity, reputational, strategic, operational, legal or compliance, and in some instances credit risk. The Board of the financial institution along with, Chief Risk Officer (CRO), and any senior management should monitor the compliance program risk across the organization. This is to ensure it remains within the defined risk appetite parameters. Earlier in 2005, AML program shortcomings generally did not trigger civil or criminal enforcement actions against banks.

Although, over the last 10 years there has been an increasing emphasis on bank compliance programs, civil enforcement actions, civil penalties, and criminal prosecutions. This change was a result of governments viewing bank compliance policies as part of the jurisdiction’s national security infrastructure versus an internal matter for the bank. This shift of approach has had substantial effects across the globe’s financial activities. FATF’s new mutual evaluation standards, implemented in 2014, have increased pressure on emerging market jurisdictions to reassess and enhance portions of their own compliance infrastructure and internal requirements.

This has brought governments and financial sector supervisors worldwide to increasingly emphasize the importance of having a strong culture of bank compliance programs within their financial sector and its leadership. This increasing attention on compliance and financial and criminal penalties has impacted the cost of compliance and banks’ risk appetites. It has had a direct effect on the provision of correspondent banking services.

Compliance Risk Management Firm-Wide 

Compliance Risk Management refers to processes used to manage compliance risk across an entire organization, both internally and externally. This approach ensures that compliance risk management occurs solely within individual business lines of legal entities. A bank’s compliance risk management program should be documented in the form of bank compliance policies and procedures and compliance risk management standards. Apart from the four pillars of compliance program, banks can use these methods to firmly integrate compliance into the overall risk-management governance:

  • Keep a single integrated inventory of operational and compliance risks
  • Maintain standardized risk, process, product, and control taxonomies
  • Coordinate risk assessment, and reporting methodologies and calendars
  • Align clear roles and responsibilities between risk and control functions at the individual risk level to ensure no gaps or overlaps (for example, third-party risk management, privacy risk, AML, and fraud)
  • Manage integrated training and communication programs
  • Establish clear governance processes and structures with mandates that span across risk and support functions that ensure sufficient accountability, ownership, and involvement from all stakeholders
  • Involve and align senior compliance stakeholders in determining action plans, target end dates, and issues requiring attention
  • Establish a formal link and coordination processes with government units

An active board and senior management oversight including an emphasis on culture to ensure a balance between the profit motive and risk-taking, compliance across all categories, a comprehensive risk measurement, monitoring, and management information systems, comprehensive internal controls, including adequate policies, procedures, and limits are some of the ways to integrate a well-equipped compliance system.

Internal Controls 

Establishing and maintaining an effective system of controls, including the monitoring of official lines of authority and ensuring the appropriate separation of duties, is of high importance to the management. The relationship which exists between the internal audit, compliance, and risk management functions has gained great regulatory scrutiny since the 2008 financial crisis.

Regulators all over the world have their attention focused on the role of internal audit and how it complements the overall risk management framework, compliance, and other control functions. The regulators need a bank to have an effective risk management function, a compliance function, and an internal audit function. These control functions, along with the bank’s operational management, constitutes the risks the entity faces and are referred to as the three lines of defense:

  • First line: operational management
  • Second line: risk management, compliance, and other monitoring functions
  • Third line: internal audit function

As these regulatory environments evolve, there will be a major opportunity for the compliance program to get ahead by implementing targeted changes to its operating model. This will deliver a better quality of oversight while at the same time increasing its efficiency. Banks that successfully make follow these guidelines will enjoy a distinctive source of competitive advantage in the future, deliver better service, reduce structural cost, and successfully de-risk their operations.

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“Mastery lies on an infinite continuum, and as a result, we will never reach the end. We can, however, see to it that we are as far along that continuum as our circumstance allows.” ― Chris Mat...

It’s Our Fourth Founding Day; Taking a Pause to Cherish Our Simple but Awesome Journey

Today, as we step into our 4th year of foundation, I feel proud and honored to be leading Tookitaki that has been successful in creating added value to all its stakeholders. I was never a CEO and Took...

Tookitaki Expands into the US with New Office in Charlotte

SINGAPORE, Sept. 24, 2018: Tookitaki Holding Pte Ltd, a leading regulatory technology company, is pleased to announce the official opening of its North American office in Charlotte, NC, in the Unite...

We Tame Machines but We Unleash Human Spirits

We are well aware of the fact that our progress as an organization is in the hands of our employees. The more energy, time and attention we invest in them, the more yield we receive. So, we always mak...

5 Methods That Modern Money Launderers Use To Beat Detection

Society prepares the crime, the criminal commits it. DID YOU KNOW? Every year, an estimated amount in the range of US$800 billion-US$2 trillion (2-5% of global GDP) is being laundered globally Regulat...

Risk Management Conference: Positive Vibes from All Corners

The Risk Management Association’s (RMA) premier annual event, the Risk Management Conference, came to an end on 6 November, and Tookitaki had the privilege to attend the event which we believe was ...

Singapore Fintech Festival: Tookitaki to showcase advanced machine learning solutions in financial services

Singapore is assured of the Fintech world’s unwavering attention next week, as the city state, is hosting this year’s Fintech Festival during 12-16 November. Touted as the world’s largest platfo...

The RMA Clarion Call to Address Risks and the Tookitaki Way

Risk officers, doing your best today is good while preparing hard for tomorrow is extraordinary. Risk management at banks has become difficult due to operational and regulatory changes. The Risk Manag...