First of all, let’s get this straight- Compliance Is Not A Choice! In this current environment where legislation is constantly being revised, money laundering activities are becoming more complex and good corporate governance seems to be absent; it is imperative that a Compliance function is present in every Financial Institution (FI). There are several reasons why a Compliance Function has become increasingly important such as:
- Setting the “Tone at the Top”,
- Handling the Increased Complexity of Money Laundering Activities and,
- Ensure Legislation is Adhered To.
1- Setting the “Tone at the Top”
Simon Mainwaring said, “Many corporate leaders and employees have the right intentions but it can be overwhelming when you consider how everything is affected”. This statement can be used to describe the conflict management faces weighing the desire for profitability against compliance requirements at each stage. In management’s aim to achieve their targets, they may become complacent or even dismissive as it relates to fundamental checks and controls to the detriment of the company. This tone can essentially be filtered down through the company with staff adopting the same approach to legislation and best practices. One example of the effect of the “tone at the top” was found in The Nation Newspaper article on 19th September 2010 “Counting the cost” referencing the case of Trade Confirmers Barbados Ltd., where the Directors were overriding internal controls, policies and procedures and in some instances, did not have the appropriate controls in place, all to the detriment of the company. The end result was the demise of the company, a substantial financial loss to stakeholders and an overall loss of confidence in the country.
In some cases this may just be an oversight, while in others it may be the prospect of getting a bonus or recognition for the speed in which the projects were executed. In any regard, the target-driven aspect of management’s role can lead to bias and regulatory negligence. This is why an unbiased function is needed, ensuring that shortcuts are not taken in the company’s operations.
The Compliance Function is an unbiased arm of the organization which reports directly to the Board of Directors of the company thus removing any influence that management can have on assessments conducted. This function continuously assesses the business’ current operations and future initiatives certifying that policies and procedures are developed and that operations are in-line with the applicable regulations and best practices. This adds value to the company by ensuring the soundness of business decisions and company processes by conducting due diligence checks and presenting Compliance Risk Assessments to the Board.
2- Increased Complexity of Money Laundering Activities
Another important reason for Compliance arises from the level of sophistication used by money launderers to integrate illegal funds into the system. Gone are the days when money launderers were persons who deposited over $10,000.00 and withdrew the funds quickly afterwards. The new money launderers are now more intelligent, patient structured; willing to use any means and wait to “clean” the funds. Financial institutions are especially vulnerable as loan and deposit facilities can be used as tools to engage money laundering activities. For instance, there have been cases of money launderers receiving loan proceeds- clean money and then using illegal funds to clear loan balances in a time frame that is not too soon to arise suspicion but still well before maturity. Meanwhile, as it relates to deposits, money launderers would deposit funds to savings accounts over time and then request a cheque for the savings balance, once again cleaning the funds. The level of complexity of these persons makes it important for a team of experts to constantly monitor the activities of the client base as there are several risks such as financial risk, reputational risk and regulatory risk that companies are exposed to.
As it relates to financial risk, clients charged and imprisoned due to money laundering activities can impact the company’s bottom line as the chances of recovering outstanding loans are significantly low. Another risk is reputational as we are in the era where information is always readily available and details are shared across media sources. This makes it easy for money launderers to be linked to the organization and can cast a negative view of its operations and thus impact on clients’ and shareholders’ confidence in its operations. Finally there is the regulatory risk, as the company and its employees may be fined for harboring the activities of money launderers and not reporting it to the relevant authorities.
The Compliance Function mitigates these risks by conducting due diligence checks on new clients and ongoing monitoring on the existing client base ensuring that the risk of onboarding a money launderer is reduced and protecting the company’s reputation. This Function also satisfies the regulatory requirement to report suspected suspicious activity to the Financial Intelligence Unit protecting the company from fines.
3- Increased Legislation
In an effort to protect economies from money laundering activities while providing guidance to the financial institutions, regulatory bodies have been increasing the requirements for businesses to complete Compliance checks to detect and deter these activities. Recently, institutions such as Western Union and Wells Fargo have been fined for having ineffective Anti Money Laundering practices in place making their companies vulnerable to these activities.
Despite these recent cases, many institutions in Barbados still have the perception that the regulatory bodies will not fine them for non-compliance and therefore, are more reserved in their approach to Compliance. This way of thinking is flawed as regionally there have been more aggressive efforts to deter non-compliance within the financial institutions. This increased attention to anti-money laundering requirements and legislative compliance may be a result of heightened cases of de-risking between the Caribbean and their correspondent bankers. The result has been increased supervision and stiffer penalties enforced by regulators. For instance, the Eastern Caribbean Central Bank recently revised their Banking Act issuing stiffer fines for regulatory breaches and causing FIs within the union to be more diligent in satisfying their regulatory requirements.
Having a Compliance Function in place allows the FI’s policies, procedures and processes are in accordance with the legislation and areas where deficiencies are identified are addressed and indicated to management for corrective action. A Compliance Function also allows for a more proactive approach to be adopted by the organization using industry best practices to improve operations and have a head start on future legislation.
Compliance- Looking to the Future
As we look to the future of FIs, there will be a growing need for internal supervision ensuring internal controls and legislation are being followed. The numerous cases highlighting lax internal controls and processes have already increased the supervision and legislative requirements from regulatory bodies in an effort to safeguard the economy. Further to this, the future role of Compliance would include setting Compliance Risk Tolerance Levels for companies as presently business-to-business relationships are being severed or “de-risked” when business relationships are deemed too risky. These increased risks, which are now attributed to the company’s internal controls and processes would cause an evolution in the economic environment making the role of the Compliance Function more complex and important. Compliance would encompass more activities both at the customer level- providing feedback on the customer base and indicating customers whose activities are too risky for the company and at the business level-verifying that legislatively all requirements were met.
With the growing importance of this Function, it becomes increasingly important that the company’s operations allow the Function to operate without restrictions. Therefore, this Function should have access to information on the organization, be involved in potential business projects and clients and have their assessments acknowledged and recognized by the Board of Directors and by extension the company. As important as the Compliance Function is and will become, it can only be effective if the organizational conditions are in place to allow the Function to operate.