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There is no place for 20th Century compliance practices in the 21st Century

May 19th, 2014 - Posted by Debbi Lyle Essey in Anti-Bribery And Corruption

The last ten years have seen an unprecedented and continuous growth in the volume of compliance and due diligence demands on banks and other financial institutions. How can these institutions use technology to ensure that they are compliant – reducing the risk of fines and resultant bad publicity at a time when trust is banks is at an all-time low?

A changing environment

Ten years ago banking had a very different feel to today. Online banking was in its infancy and the majority of banking was still branch-based. The world was also a very different place with business much less globalised. Ten years on and a banking crisis - leading to a global economic recession - has changed the perception of banking significantly. The historical view of the reliable local bank manager has been replaced by one of high risk institutions, out of control and involved in unnecessarily complex financial schemes.

This is manifested in the Edelman Trust Barometer 2013, an annual survey into the public’s trust and credibility of institutions. Banks and financial services remain the least trusted businesses, with levels of trust in banks falling to 23 percent in Germany, 22 percent in the UK, 19 percent in Spain and 11 percent in Ireland. Public trust in banks, globally, is now 11 points lower than it was in 2008.

Free market is replaced by regulation

Since the banking crisis of 2008, financial institutions have been under more scrutiny than ever. In the UK alone the regulatory environment has changed significantly: 

• The Financial Services Authority has been replaced by the Financial Policy Committee to oversee regulation and the Prudential Regulation Authority to watch the soundness of individual companies. 

• The Financial Conduct Authority oversees consumer protection and compliance.

• In the USA, the Consumer Financial Protection Bureau is charged with policing financial products. 

• There is also a new regulatory regime for derivatives to help make the market more transparent. Banks on both sides of the Atlantic are now required to hold more capital on hand to protect against future downturns.

Compliance regulationBeyond these consumer protections, the global issues of money laundering,bribery and corruption have all been the subject of significant legislation since the 2001 terrorist attacks in New York and the subsequent focus on funding for global terrorism.

corruption have all been the subject of significant legislation since the 2001 terrorist attacks in New York and the subsequent focus on funding for global terrorism.

The European Union, UK and U.S. governments, along with several other countries globally, have legislated against bribery, money laundering and use of money for terrorism since 2001 with a wealth of regulation. In the UK alone, four major pieces of legislation were introduced between 2000 and 2005 related to terrorism, crime and money laundering.

The challenge for financial institutions

In such a fast moving environment - and with the spotlight firmly placed on banks and financial institutions - it is perhaps not surprising that the banks, traditionally not the fastest businesses to embrace change, have fallen foul of the slew of new legislation. 

Banks and financial institutions have needed to completely transform their approach to compliance, business practice and monitoring against a backdrop of changing legislation and a significant globalisation of business. This has been further complicated by the additional media interest in bank practices that followed the banking crisis. 

Terms such as KYC (Know Your Customer)and EDD (Enhanced Due Diligence) are now at the heart of compliance in banking. Whereas in the past, banks and financial institutions might have tended to give the benefit of the doubt about a transaction to the customer, this no longer applies. Lists of politically exposed persons, sanctions lists, watch lists and black lists of people and companies are now all part of the make-up of bringing new clients to a financial institution or monitoring current client activity for signs of risk.

Using technology to drive compliance

The critical issue for financial institutions is that sanctions change as new people and companies are added to watch lists and black lists. Consider, for example, the growing crisis around Russia and Ukraine. In one day in April 2014, the European Union issued asset freezes and travel bans on fifteen people. A day earlier the US had issued sanctions against seven individuals and sixteen companies. 

These are not isolated incidents. Sanctions can be issued for anti-terrorism or against countries with a chequered democratic or human rights record. They can be imposed across a whole country or against companies or individuals, the latter of which is particularly difficult to manage. Why? Because individuals often have a relationship with multiple businesses in different business areas. Connecting the dots and playing detective to ensure compliance with sanctions can be challenging.

The future: more compliance, more regulation

As recently as April 2014, the European Parliament adopted a directive on the disclosure of non-financial information. Companies with more than 500 employees will need to report on diversity, environmental and human rights issues. This development signals the direction of national and international legislation in the future: more regulation is something that all larger businesses should expect to face in the future.

Banks and financial institutions should expect to be at the forefront of this. Increased concern about money laundering and financial fraud, combined with the global threat of terrorism and the increased complexity of global business transactions make it incredibly challenging for banks and other financial institutions to ensure they are compliant with national and international legislation unless they leverage the technology that is available to support them in this role. 

There is no place for 20th Century compliance practices in the 21st Century. Nor is there any need for there to be. The availability of data has never been greater. The technology that can be accessed to interpret this data, transforming it into actionable insight, can help ensure a bank or financial institution is compliant with regulation in an increasingly complex financial environment.

The LexisNexis solution

LexisNexis helps financial institutions to ensure compliance with a suite of products and services that provide access to the most up to date information from trusted and reputable sources. Find out more here.


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