The following sections will give more details on what compliance and risk mean in the banking industry, the role of compliance policies in banking, types of compliance in banking, who is responsible for ensuring compliance in the bank, and all other fundamental concepts of risk and compliance in banking.
Banks and financial institutions must follow a set of strict laws, regulations, and policies in the due course of their operations. The work of banks would be considered legal and proper only if these laws and policies are followed without any compromises. These rules, together, are called bank compliance.
Following these rules is mandatory for all banks and institutions to continue with their operations, without any hassles. Local and international Financial Regulatory Agencies, domestic government bodies, and other authorities in this field may devise these laws and regulations. In India, the banks must conform to banking compliance rules devised by the Reserve Bank of India, Banking Regulation Act, Foreign Exchange Management, Money Laundering Act and the like.
The compliance policy of the bank covers the following areas:
a) Ensuring that proper internal controls are in place
b) Conducting regular risk assessment and management sessions
c) Ensuring that proper policies are in place to check fraudulent accounting by banks to evade taxes
d) Monitoring and assessing every financial transaction in detail to prevent money-laundering activities
e) Ensuring that sensitive data of banks and customers are protected, thanks to effective data security laws
To know more about risk and compliance in banking, one should know about the common types of compliance found in this sector across the country. Though we have already mentioned in the above section the various aspects that the compliance policy of the bank covers, here is a brief overview of each of these aspects for better understanding.
In this type of compliance, strict rules are in place to ensure that the bank carries out its operations ethically and legally. Employees of the bank are given enough training on the ethical code that needs to be maintained. They are also informed about the consequences of non-compliance, and about all that the compliance policy of the bank covers so that their knowledge is clear.
A Chief Compliance Officer, who is responsible for ensuring compliance in the bank, along with his/her team ensures that the policy takes into consideration all the risks that banks might face, and lists out ways to mitigate these risks/manage them effectively. This team evaluates all types of risks – the inherent ones and the residual ones. These risks could occur in the normal course of business operations, data management, auditing, dealing with third parties, and the like. All scenarios right from the risk origination to the way it can be controlled are considered in this aspect.
This is one of the important factors of bank compliance. The compliance team checks the transactions of the banks in detail to know about the authenticity of the customers. They check the sources of funds to know if the banks are dealing with stolen funds or money from inappropriate or illegal sources. Checking for tax evasion is also one of the parts of anti-money laundering compliances of banks. Customers may resort to fraudulent financial transactions to evade taxes.
Breach of data security is one of the common issues that we face today. Customer’s data and bank account details get leaked through various means. This leaked information is misused by the miscreants, leading to several unethical banking practices across the country. So, the compliance policy of banks ensures that there is a team in place to ensure the confidentiality of sensitive information and prevent data leaks of any sort.
The next important thing to understand is who is responsible for ensuring compliance in the bank. The Chief Compliance Officer (CCO) is responsible for bank compliance in the banks. Along with their teams, CCOs not only formulate the policies of compliance but also ensure that it is implemented across all the levels in the banks to reinforce ethical and legal banking processes at each stage. Some of the main roles of a CCO and the compliance team are as follows:
a) To inform the Board of Directors and the senior management of the banks about the compliance policies, and offer clarification for any compliance-related issues that they might have
b) To conduct regular and annual risk and compliance assessments to identify new risks (if any), and submit the findings to the Audit Committee for further action
c) To report all types of compliance breaches immediately to the Board of Directors, senior management, and the Audit Committee
d) To consistently track that the bank’s compliance and risk processes are updated as per the latest guidelines of the RBI/ other financial regulatory bodies
Adhering to bank compliance is very important as it is directly related to the integrity of the operations in a bank. All banks have a dedicated compliance team headed by the Chief Compliance Officer to help them adhere to these rules and regulations. Failure to comply with these rules can adversely impact banks, which is why compliance is taken quite seriously by all types of banks today. With proper compliance and risk assessment in place, banks can stay away from unethical and illegal practices. Eventually, this helps them to gain a lot of reputation in the eyes of all their stakeholders.