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No matter your industry, the need for compliance is a fact of life. Adhering to relevant standards and regulations can boost business success, while running afoul of the law can bring significant monetary and reputational costs. The banking industry is no exception. But what is compliance in banking? Understanding this process is key to running a successful bank and avoiding hefty penalties.
What is compliance in the banking industry? Compliance in banking involves adhering to laws, regulations, and standards designed to ensure smooth financial operations. To remain compliant, banks must implement policies and procedures to prevent illegal activities like money laundering and fraud.
In banking, compliance also covers consumer protection laws. Banks are required to monitor and report suspicious activities, conduct thorough due diligence on clients, and maintain robust internal controls. Non-compliance can result in major penalties, which is why many banks make compliance a top priority.
The banking sector involves several complex laws and regulations. Unlike some other industries, where the stakes are lower, banking deals with highly sensitive personal and financial data, and this necessitates a more robust approach to compliance.
The Bank Secrecy Act, also known as the Currency and Foreign Transactions Reporting Act, was enacted in 1970 and is one of the cornerstone laws in US banking compliance. It requires financial institutions to keep detailed records of cash transactions exceeding $10,000 and report any suspicious activities that could be criminal in nature.
Banks must also file Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs) to the Financial Crimes Enforcement Network (FinCEN). By complying with the BSA, banks play a crucial role in combating money laundering and other financial crimes.
The Dodd-Frank Act, enacted in 2010 in response to the 2008 financial crisis, introduced drastic reform to the US financial system. It established the Consumer Financial Protection Bureau (CFPB), which oversees consumer protection in the financial sector.
This act also implemented stricter regulations on derivatives and created the Volcker Rule, which restricts banks from engaging in proprietary trading and limits their investments in hedge funds and private equity. So, in a nutshell, the Dodd-Frank Act is designed to reduce systemic risk, increase transparency, and protect consumers from predatory lending practices.
Passed in 1999, the GLBA deals with data privacy and protecting consumers’ financial information. It essentially requires financial institutions to explain their information-sharing practices to customers, taking whatever necessary precautions to safeguard their data.
The act includes provisions like the Financial Privacy Rule, which governs the collection and disclosure of such information, and the Safeguards Rule, which mandates that financial institutions implement security programs to protect this information.
AML regulations were created to prevent criminals from disguising illicit funds (“dirty money”) as legitimate income. These regulations mandate that banks implement certain systems and controls to detect and report activities that could be related to money laundering or terrorist financing.
For example, banks are required to perform customer due diligence (CDD), which involves verifying customer identity and considering the nature of their business to assess the risk of illegal activities. Enhanced due diligence (EDD) is also required for high-risk customers.
As you might imagine, the penalties for non-compliance in banking can be severe. Monetary fines range from several thousand to several millions of dollars. Non-compliance can also result in criminal charges for offending banks. In the worst cases, institutions can lose their banking licenses and be shut down.
A notable example of non-compliance in the banking industry is HSBC Holdings (HSBC). In 2012, they agreed to pay a $1.9 billion fine to US authorities for failing to implement adequate anti-money laundering controls. HSBC was accused of allowing drug cartels in Mexico to launder billions of dollars through its US operations.
In another shocking case, BNP Paribas, a French bank, was fined $8.9 billion in 2014 by US authorities for violating US sanctions. The bank admitted to processing billions of dollars in transactions for entities in Sudan, Iran, and Cuba, countries subject to US economic sanctions. The BNP Paribas situation highlighted the importance of adhering to sanctions regulations.
While cases like these are extreme examples of what happens when banks fail to comply with the law, they serve as a stark warning to other financial institutions. By adhering to all relevant compliance laws, banks can avoid falling from grace.
Compliance is entirely within your control, but ensuring continuous adherence requires significant time and effort. Here are a few tips for complying with relevant banking laws.
If you haven’t already done so, now is the time to develop a good compliance program. This should include everything from clear policies and procedures to the implementation of robust internal controls. The program should be tailored to the specific regulatory environment in which your bank operates.
Education is the foundation of compliance. By making your employees aware of necessary protocols, you can create a culture of compliance from the get-go, making adherence second nature to those within your institution.
Help employees learn what compliance in banking is by answering their questions and addressing their concerns. Establish easy reporting systems so that they can easily bring compliance issues to light.
Conduct regular compliance monitoring and auditing to identify potential compliance gaps. Implement monitoring systems that track transactions, customer activities, and any unusual patterns that may indicate non-compliance with AML sanctions or other regulations.
Understanding what compliance in banking is takes time, and getting things right may take some trial and error. The good news is you don’t have to tackle it alone. Compyl makes it easy to monitor compliance and stay on target with key regulations. Contact us to learn more about our modern integrated GRC platform and see how we can get you on track with banking compliance.
