compliance functions in banks: back to basics

8/13/2019 Compliance functions in banks: back to basics

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Bank Regulations

Bank regulationsare a form

of regulation which subject banks to

certain requirements, restrictions and

guidelines. This regulatory structure creates

transparency between banking

institutions and the individuals

and corporations with whom they

conduct business, among other things.


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Objectives of Bank Regulation

Prudentialto reduce the level of risk to which

bank creditors are exposed (i.e. to protectdepositors)

Systemic risk reductionto reduce the risk ofdisruption resulting from adverse tradingconditions for banks causing multiple or majorbank failures

Avoid misuse of banksto reduce the risk of banksbeing used for criminal purposes, e.g. launderingthe proceeds of crime

To protect banking confidentiality

Credit allocationto direct credit to favoured

sectors It may also include rules about treating customers

fairly and having corporate socialresponsibility (CSR)


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Compliance Function

The compliance function is acquiring increasing

importance in banks on account of growing

regulatory complexity and also creating a

demand for competent banking compliance

professionals.

For the long term stability and survival of the

bank, it is important that a healthy compliance

culture is developed and percolated down to the

lowest level functionaries in the bank.


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Compliance refers to a set of laws,

regulations, rules, practices, related Self-

Regulatory Organization (SRO) standards,

and codes of conduct applicable to the

various banking activities.

It is broadly segregated in three parts-

banking compliance can be

a) Internal compliance, including SRO standards

b) Regulatory Compliance

c) Legal Compliance.

There are also industry standards and codes

set by BCSBI,FIMMDA, FEDAI and IBA which

need to be followed by the banks.


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COMPLIANCE FUNCTION contd........

Compliance starts at the top. It will be most

effective in a corporate culture that emphasises

standards of honesty and integrity and in which

the board of directors and senior management

lead by example.

It concerns everyone within the bank and

should be viewed as an integral part of the

banks business activities.

The expression compliance risk is defined asthe risk of legal or regulatory sanctions, material

financial loss, or loss to reputation a bank.


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Responsibilities of Compliance

Function

Advice - The compliance function should advise

senior management on compliance laws, rules

and standards, including keeping them informed

on developments in the area. Guidance and education in educating staff on

compliance issues, and acting as a contact point

within the bank for compliance queries from

staff members.


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Establishing written guidance to staff on the

appropriate implementation of compliancelaws, rules and standards through policies and

procedures and other documents such ascompliance manuals, internal codes ofconduct and practice guidelines.

Identification, measurement and assessment

of compliance risk.

Monitoring, testing and reporting


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Compliance Functions in

Banks

A banks compliance policy will not be

effective unless the board of directors

promotes the values of honesty and integrity

throughout the organisation. Compliance

with applicable laws, rules and standards

should be viewed as an essential means to

this end.

Banks may wish to organise their compliance

function within their operational risk

function, as there is a close relationship

between compliance risk and certain aspects

of operational risk.


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Regardless of how the compliance function isorganised within a bank, it should be

independent and sufficiently resourced, itsresponsibilities should be clearly specified,and its activities should be subject toperiodic and independent review by theinternal audit function.

Outsourcing

Compliance should be regarded as a core riskmanagement activity within the bank.Specific tasks of the compliance function may

be outsourced, but they must remain subjectto appropriate oversight by the head ofcompliance.


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Why Non Compliance?

There are numerous problems at

multiple levels

The industry regulator

The government

The banks themselves.


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Issues in Banks

Sales culture with a focus on cross selling

Profit maximization drives banks beyond core

tasks, to hawk products such as equities,

insurance and mutual funds

Inadequate training and lack of incentives for

bank staff to blow the whistle on black money

Wide range of documents besides PAN cards

accepted under KYC norms

No verification of customers address or job


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Government Issues

96 million PAN cards for only 34million tax fillers as on March 2010

No bank records of the source of

money after 7 years as per income taxrule

No follow up on people who make

large financial transaction without

submitting PAN proof


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Industry Regulator

KYC norms not tight enough

Eg: A company ID and employers

letter are enough to open a new

account RBI has only about 20000 employees,

while the number of bank branches is

over 80000

Banks KYC documents are sufficientto buy insurance products


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Types of Non-Compliance

Know Your Customer

Anti Money Laundering

Tax Evasion


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KYC

KYC is an acronym for Knowyour Customer,aterm used for customer identification process.

It involves making reasonable efforts todetermine true identity and beneficial

ownership of accounts, source of funds, the

nature of customers business, reasonableness

of operations in the account in relation to thecustomersbusiness, etc which in turn helps the

banks to manage their risks prudently.


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The objective of the KYC guidelines is to prevent

banks being used, intentionally or

unintentionally by criminal elements for money

laundering. KYC has two components - Identity and Address.

While identity remains the same, the address

may change and hence the banks are required to

periodically update their records.


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To ensure that the latest details about the customerare available, banks have been advised to

periodically update the customer identificationdata based upon the risk category of the customers.

Banks create a customer profile based on detailsabout the customer like social/financial status,

nature of business activity, information about hisclients business and their location, the purposeand reason for opening the account, sources ofwealth or income, expected monthly remittance,expected monthly withdrawals etc.


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AML -ACT A set of procedures, laws or regulations designed

to stop the practice of generating incomethrough illegal actions.

In most cases money launderers hide theiractions through a series of steps that make itlook like money coming from illegal or unethical

sources was earned legitimately. An example of AML regulations are those that

require institutions/banks issuing credit orallowing customers open accounts to complete a

number of due-diligence procedures to ensurethat these banks are not aiding in money-laundering activities.


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Alternatives

At the Bank level -Penalties should belevied on employees who are not adheringto compliance while meeting their targets.

At the level of the regulator - the ReserveBank of India(RBI) - need to improve thefrequency and quality of inspection

The government level - need to speed up

Aadhaar - the national uniqueidentification (UID) number project - as itwould eliminate the multiplicity ofdocuments.


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CONCLUSION

A compliance failure can resultin

Litigation

financial penaltiesregulatory constraints

reputational damage that can

strategically affect anorganization.


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Right persons for the right job.

The quality of staff


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Reference

http://www.pwc.com/us/en/financial-services/regulatory-services/bank-regulatory-compliance.jhtml

http://en.wikipedia.org/wiki/Anti-money_laundering#Enforcement

http://en.wikipedia.org/wiki/Bank_regulation

http://www.pwc.com/en_US/us/anti-money-laundering/publications/assets/aml-utility.pdf

http://businesstoday.intoday.in/story/cobrapost-expose-on-money-laundering-by-banks/1/193462.html

http://articles.economictimes.indiatimes.com/2013-04-

12/news/38491572_1_three-largest-private-banks-independent-forensic-enquiry-icici-bank

AntiMoney laund_graphsA survey by World -Check andBMR Advisors
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compliance functions in banks: back to basics

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