Compliance refers to how a bank or any other organization adheres to applicable laws, policies, and regulations in the jurisdiction they operate. Meeting compliance is critical for banks and other financial institutions to ensure customers’ and shareholders’ satisfaction, protect employees, gain trust, and build a reputation in the market.

Compliance starts at the top and it’s all about treating the customers fairly and winning the customers’ trust. Over the past decade, Compliance Risk Management has become one of the most significant concerns for financial institutions as they prepare to operate in the ever-evolving regulatory landscape, avoid hefty regulatory fines, and safeguard their reputation.

What is Compliance Risk Management?

Compliance Risk Management (CRM) refers to the process of identifying, analyzing, and monitoring the risks to a bank or financial institution’s compliance status vis-à-vis the regulatory norms and industry standards.

CRM includes implementing and monitoring internal controls and assigning dedicated roles, responsibilities, and accountabilities. This step maps risk management accountabilities, assuring that the business conforms to the applicable legal and industry obligations.

It also includes documenting the potential liabilities and losses the organization may face if it fails to comply, such as fines, legal penalties, sanctions, and business and reputational loss. It also comprises the necessary risk mitigation and remediation procedures to keep compliance risks at an acceptable level, preferably within the organization’s risk appetite.

A well-developed enterprise risks management framework (EMRF) with the requisite compliance risk management controls, policies, and procedures can help financial institutions strengthen their compliance risk programs and mitigate or eliminate the gaps across their operations.

Compliance Risks in the Banking Industry

Compliance risk, also called integrity risk, refers to legal or regulatory sanctions, loss of reputation, or material or financial losses due to a bank’s failure to comply with applicable regulations, laws, rules, and banking industry standards.

Financial institutions must manage compliance risks by implementing, monitoring, and testing necessary controls and policies to detect and mitigate potential compliance risks.

Compliance risks are often overlooked as they blend in with operational risks, which can hamper specific preemptive and mitigative measures, exposing the financial organization to risks such as:

  • Legal penalties
  • Payment of damages/reparation
  • Limited business opportunities
  • Diminished or tarnished reputation
  • Reduction in the franchise value
  • Reduced expansion potential
  • Void contracts

Types of Compliance Risks in the Banking Industry

Below are some common compliance risks banks are exposed to:

1.     AML/CFT and BSA Violations

The Bank Secrecy Act (BSA) and USA Patriot Act are laws to direct globally concerted efforts for Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT).

Banks or financial institutions found guilty of violating AML/CFT standards or BSA regulations can face significant legal and regulatory consequences. This includes hefty fines by regulators that can cause financial losses and reputational damage.

2.     Violations of the Consumer Financial Protection Act

The U.S. federal and state laws mandate banks and financial institutions to treat their customers fairly and responsibly. They must implement controls and measures to protect their consumer from any harm caused by,

  • Discrimination
  • Deceptive practices
  • Unfair fees
  • Any other forms of mistreatment

Banks or financial institutions must send up-to-date information about new products and services and ensure they are simple to understand, easily accessible, and not deceptive.

The Consumer Financial Protection Act of 2010, also called the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, centralizes the regulation of financial products and services.

If an institution is found violating consumer protection laws, it may suffer reputational damage and regulatory enforcement, resulting in loss of clients and business opportunities.

3.     Data Privacy Violations

Banks need to collect customers’ personal information to deliver highly personalized and enhanced experiences. A slew of data privacy laws and regulatory guidelines direct the entire process of handling customers’ personal data and personally identifiable information (PII). Some of the prominent laws include the General Data Protection Regulation (GDPR), California Consumer Privacy Act (CCPA), Virginia Consumer Data Protection Act, etc.

Some of the key guidelines in data privacy laws include:

  1. Banks and any other organization collecting and using personal data need to obtain prior explicit consent from the customer
  2. They must implement appropriate controls to securely collect and use the data for the intended purposes only
  3. The entity must retain the personal data or any other sensitive information for the permitted duration and then destroy it using approved tools and procedures

Newer regulations hold banks more accountable for consumer data protection, privacy, and security incidents.

Banks also need to protect their electronic processes from disruption by threat actors, including unauthorized or ex-employees. Failure in implementing robust cybersecurity controls and procedures can expose the bank to cybersecurity risks, such as data breaches, financial fraud, and financial crimes, and lead to regulatory sanctions or civil lawsuits.

4.     Customer Due Diligence Failure

Customer Due Diligence (CDD) is a major part of the Know-Your-Customer (KYC) process. It refers to the bank’s processes to collect and evaluate information about a potential customer. This is done to uncover any potential risks to the institution or bank in doing business with the specific person or organization.

Failure to authenticate its customers’ identities and understand their business activities, financial transactions, and risk exposure may cause CDD failures, leading to credibility loss, financial crimes, and sanctions by regulators.

Type of Compliance Risks in ERM

Manage Compliance Risks with an Enterprise Risk Management Framework

The banking industry is one of the most heavily regulated industries with a plethora of regulations and laws. Banks need to continuously analyze the new compliance rules and requirements and apply adequate control measures and monitoring systems to stay compliant.

However, managing compliance risks traditionally in a growingly stringent regulatory environment with hundreds of rules and regulations poses unique challenges.

Anaptyss as a strategic partner helps banks streamline compliance management and keep up with regulatory changes by identifying the risk areas associated with banking operations or tasks. We help implement risk controls and risk management frameworks to mitigate various enterprise risks efficiently.

Our exclusive Digital Knowledge Operations™ (DKO™)-based approach combines domain expertise and digital solutions in a customized manner to help financial institutions manage enterprise risks and fulfill regulatory compliance requirements, meet applicable rules and laws, including AML/CFT and various other obligations.

Interested in more specific guidance for compliance risk management, including AML/CFT Compliance?

Write to us: [email protected].

Susan Smith

Susan Smith

Director - Enterprise Risk Management

Susan is a strategic and innovative leader with a demonstrated record of driving positive financial results in risk, capital, and insurance services. With over three decades of experience, Susan has worked with some of the largest global financial institutions, solving their Enterprise Risk Management challenges while proactively developing long-term strategies for creating organizational added value and positive ROI.

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