What You Need to Know about Banking Compliance
Mar 1, 2021

Compliance is one of the most important challenges for any banking institution operating in today’s market. Non-compliance has consequences, and in 2020 alone, several banks received major fines amounting to $11.39 billion. U.S. banks Goldman Sachs, Wells Fargo, and JP Morgan Chase paid upwards of $7.50 billion toward this total tally, indicating that even the sector leader isn’t immune. Naturally, any form of negligence within this realm of operation can lead to big losses, especially considering how strict legislation has become in the sector.

Evolution of banking compliance

The banking sector has always had compliance models in place, but it is becoming increasingly common to find banking entities funnel  money into their compliance department. Some assume it is to keep up with the ever-changing compliance environment or to institute more-efficient controls. Whatever the reasoning, one thing is exact, and it is that optimizing protocols to stay compliant is now more of a priority than it used to be. 

Going back a few years, the textbook compliance model was simply a stand-in to enforce legal function. In fact, it was maintained mostly in an advisory capacity without much of a focus on risk management or its identification. Such a model may be best suited as another lesson for managers to learn from in today’s environment. With the advent of process automation, wide-spread digitization and globalization, compliance literacy is undoubtedly the need of the hour. 

However, even though many banking enterprises, including regional and small-scale entities, have some form of compliance framework in place, there are still a number of important questions that go unanswered. These are pertinent to the big picture, i.e., complete compliance, and the answers help establish effective models. For greater insight and to broaden your understanding on banking compliance, read on.  

What are the responsibilities of a compliance department?  

In any bank, the compliance department is the body responsible for ensuring the institution as a whole remains compliant. Its goal is defined, and it is to ensure the bank functions within regulation, thus preserving its integrity and reputation in the industry. In a vacuum, the compliance department is usually tasked to: 

  • Safeguard the bank from data theft 
  • Protect against fines imposed by the government
  • Prevent tax evasion
  • Prevent money laundering
  • Identify and analyze risk areas
  • Steer clear of activities that aren’t within the bank’s ethics policy

Besides these, the department may also be tasked with creating a compliance program or policy. This is usually achieved through a joint effort with senior management. The department establishes the general policy while the management establishes the culture of compliance across the enterprise. Some of the best ways this is achieved is by: 

  1. Proactively communicating the compliance policy to all personnel in the institution 
  2. Disclosing ethical conduct as bank culture
  3. Standardizing processes

The third point is a significant responsibility as it ties into efficient risk management. With a standard process for routine operations like doing inventory, addressing risks, managing problems and offering resolution, the organization becomes a lot more efficient as it acts only on the basis of bank policy. In addition to all this, the compliance department has a responsibility to ensure that customers interact with the bank as per regulation. Any acts committed outside the purview of regulation or may cause the bank to become non-compliant must follow a clearly defined set of rules. 

For instance, as per the Office of Foreign Assets Control, banks in the U.S aren’t allowed to process any transactions from individuals and countries that the U.S. has previously sanctioned. Any attempts made must be blocked and reported, failing which, the bank will face serious consequences. All of these responsibilities are handled by a compliance department, and it is clear that having the right tools in place can make all the difference when assessing the true efficacy of any compliance program. 

How can banking enterprises stay compliant effectively? 

In an industry where regulations shift regularly, it can be hard to adapt on the fly. But it must happen as being non-compliant, in any sense, is detrimental. Thankfully, to operate within regulation, there are reliable practices you can enforce. 

Streamline the risk-and-control framework

It is common practice for banking enterprises to have dedicated teams to put out fires caused elsewhere in the organization. While this works, there is potential for wastage of precious resources, which is suboptimal. A smarter approach would be to implement a control where the risk is managed by the same department causing it. This streamlines responsibility and control performance, even if the control has multiple owners. 

 Manage residual risks

Inherent risk is defined as the risk that exists without considering the external controls. However, residual risks is the risk that remains even after the treatment or in presence of controls and to deal with these effectively, consider these four options:

  1. Risk mitigation: A common practice, usually the go-to in the industry, and it relies on decisions taken by management. 
  2. Risk acceptance: This is when the risk is accepted, and the plan of action is to monitor the risk levels and review the risk periodically to ascertain if acceptance is the best way to manage it. 
  3. Risk avoidance: With such an approach, the banking enterprise avoids engaging with the risk or disengages from it entirely. 
  4. Risk transfer: This involves transferring the risk to another entity such as an insurance company. With such a tactic, the risk of loss is borne by the insurance provider. 

Integrate with risk management governance

This practice is closely linked to establishing more streamlined risk controls and nurturing a company-wide risk-aware culture. In this case, standardized processes are pivotal and everyone is accountable, not just the compliance department. The communication begins at the highest level of management right down to maintenance staff.  

What are the best ways to manage compliance costs? 

Because compliance regulations are always changing, it is unwise to respond by creating new protocols or databases to stay compliant. Instead, consider adding your existing processes by making workflow improvements. These should integrate seamlessly and eliminate the need to divert capital to keep up with regulatory reform. Another way to go about it is to leverage the power of technology and automation. This includes tools that can: 

Tools to manage compliance costs
  • Automate data gathering
  • Monitors risks
  • Control data validation 

These tools greatly improve operational efficiency while remaining completely compliant with the added bonus of enhanced customer service. One tool that offers these benefits and more is the VComply platform. It offers a fully-stacked GRC suite to simplify compliance and risk management. Armed with the software, you can revolutionize your enterprise’s approach to staying compliant and implementing risk controls. To know more, contact us online.   

Compliance is one of the most critical challenges for any banking institution operating in today’s market. Non-compliance has consequences, and in 2020 alone, several banks received significant fines amounting to $11.39 billion. U.S. banks Goldman Sachs, Wells Fargo, and JP Morgan Chase paid upwards of $7.50 billion toward this total tally, indicating that even the sector leader isn’t immune. Naturally, any form of negligence within this realm of operation can lead to big losses, especially considering how strict legislation has become in the sector.

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