What is a Bank Compliance Program? (2024)

What is a Bank Compliance Program?

Since the first enactment of the Bank Secrecy Act (BSA) in 1970, the regulatory environment has evolved over the last four decades. Many regulatory changes have been brought upon to establish different AML/CFT measures in financial institutions and the global financial system.
Having a comprehensive compliance program in a firm can make a great impact not only on the same organization, but the entire financial industry. All businesses under the regulatory requirements are obligated to meet certain policies and standards that are meant to protect the firm’s clients, employees, and various directors/shareholders.

With an increase in the regulatory requirements, firms are required to monitor their banking-relationships with clients, as well as financial networks in foreign jurisdictions. Upgrading a bank compliance program can put financial institutes in a stronger position to maintain or grow their network, serve their customers more effectively, and provide to the global economy. Continuous improvements in compliance within financial institutions pervade the global financial system. So, 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?

What is compliance in banking? There have been existing issues about firms understanding the basics of regulatory requirements, or the operations, processes, and procedures which include them. A lot of the time, the banks may even try to adopt ineffective AML measures by having labor-intensive control activities, or spend irrationally on compliance software that is not appropriate to the bank’s requirements or needs. What the firms need to understand is that there needs to be a basic understanding of compliance literacy, accountability, incentives, and how to mitigate risks, all of which can have a strong impact on the bank’s profile. Compliance in banking means that the firm should be equipped with the resources which will help the compliance operations to identify, monitor, or report on ML techniques.

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.

There are many effective ways to execute business processes by compliance. One is to assess the compliance-risk on a routine basis by keeping a number of workshops. This will help to know the firm’s internal risk exposures, as well as their effect on the business processes. The organization can even keep business processes to flag relevant changes in the firm’s operations related to their products, systems, volume, etc. In the case of measuring risks, firms can have risk markers to identify those risks that are difficult to measure, keep an inventory for the common risk outcomes, and analyze the scenarios for future risk assessments.

Bank Regulatory Compliance and How to Establish Compliance Risk Measures?

Bank regulatory compliance means that the financial institutions must comply with the regulations, both internally and externally. This will help to prevent, detect, and investigate any illicit activities in the firm. The regulatory compliance program allows the bank to develop efficient risk-prevention strategies and standards which are appropriate for the firm’s ethical conduct and risk management. The senior management, along with the bank compliance officer, are instructed to establish and maintain a culture of compliance within the organization, while providing access to necessary tools and controls which can help with firm-wide compliance and risk-management.

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

However, over the last ten years, there has been an increasing emphasis on bank regulatory 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 a substantial effect across the globe’s financial activities. FATF’s new mutual evaluation standards, which were 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 caused 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.

Compliance in Financial Institutions - Practicing Compliance Risk Management (CRM)

How to practice firm-wide compliance in FIs? The compliance risk management ensures a combined approach for the entire organization that they need to adhere to the necessary governance requirements based on laws and regulations.

The Compliance Risk Management (CRM) is focused on having transparency in the firm’s operations, as all of the policies and processes will be documented by the firm to meet the government’s standards. The methods to integrate the compliance program into the firm-wide risk-management include an inventory to record all operations and risks, maintain the standardized risk and processes, integrate training programs, and involve the firm’s directors in defining the action plans or any other issue.

A few things to consider for having a firm-wide CRM:

1. The approach to CRM throughout the firm should generate meaningful compliance risk information and analysis over static reporting
2. The monitoring and testing for the effectiveness of the compliance with the regulations should be comprehensive and risk-focused
3. The firms should have appropriate reporting tools and analysis in order to maintain an effective board and senior management oversight
4. The firms should have systematic procedures and clear duties that support the risk-based, independent compliance oversight

Here are some of the ways to integrate a well-equipped compliance system:

1. an active board and senior management oversight including
2. an emphasis on culture to ensure a balance between the profit motive and risk-taking,
3. compliance across all categories,
4. a comprehensive risk measurement,
5. monitoring, and management information systems,
6. comprehensive internal controls,
7. including adequate policies, procedures, and limits