by Fiamma De Nardo, Legal Fellow
International banking groups are increasingly involved in money-laundering scandals, making it necessary for legislators around the world to enforce higher standards of compliance. Consequently, large banks have started to cut back their service in several countries, claiming that these new standards will bring about an increase in the cost of compliance. This situation has led to consequences for countries with “high risks” and their citizens who use financial services, such as banking and remittances services, to sustain and improve their livelihoods.
The aim of this blog is to dig into the main issues that concern the cost of compliance and subsequently analyze how the most recent financial regulations have affected the enforcement of anti-money laundering legislations.
This first article will try to identify the main elements that impact on the cost of compliance and ultimately figure out what role state and supranational legislations have played lately. This topic raises the two following issues:
· Whether a “balance” between risks and profit is viable in the banking system and to what extent
· What factors increase the cost of compliance?
Answers to the above-mentioned issues may be found considering the risk analysis agenda. This involves financial stability and brings about the possibility that financial activities in the banking system may be affected by shadow banking. Hence, senior managers are required to be quickly able to spot “the pain points” and subsequently take appropriate action. With the enforcement of new AML regulations, financial firms are increasingly seeking to safely navigate the complex legal environment. Failure to enforce the new standards of compliance from the largest banking groups would pose the greatest risk to the financial system. Nevertheless, changes in the regulations have been so sweeping lately that many firms have questioned their short-term and long-term effectiveness.
From a broader perspective the recent changes in the AML legislations are likely to increase the communications between regulators and financial firms given that the regulators themselves have become more persistent in guaranteeing the legitimacy of funds placed in the financial system.
Consequently, firms have become concerned with how to comply with the ever-more complex regulations. Additionally, the above-mentioned regulatory communication will ultimately strengthen due to the need to “liaise” with multiple global regulators. This means that companies are now required to:
· effectively coordinate different legal sources
· share information with different regulators
· coordinate the effort of different regulators to ensure a smooth enforcement of different legal measures
The consequences of not communicating effectively may be severe. Thus, firms are encouraged to disclose issues found in their practice to enhance the industry’s reputation and subsequently decrease the cost of the practice.
The fact that a consistent percentage of firms are expecting their budget to rise either slightly or significantly in the upcoming years to comply with the most recent financial regulations shows that managers in charge of budgetary decisions are likely to be “risk aware”. Hence, financial firms need to provide a well-resourced compliance branch that may be able to mitigate the impact of stricter enforcement measures on risky transactions.
The legal environment has changed dramatically. The most recent state regulations show the necessity to prevent accidents detrimental to clients. Secondly, legal sources of different nature start interacting with each other to prevent and deter accidents. Hence, enforcement measures look much stricter than how they used to and there is no defense to argue that other firms “were doing it too”. Willful blindness is not a deterrent factor anymore. Compliance officers are required to maximize the effectiveness of corporate governance and risk management. Therefore, every firm should have two offices in charge of enforcing measures on Anti-Money Laundering. The Internal Audit division should be aimed at assessing the “internal control structure” of the bank, while managers should be focused on strengthening the control, and ultimately monitoring the implementation of the above-mentioned measures. Hence, due diligence, risk management and transparency are the three key practices in this procedure.
To identify the actual cost of compliance it may be useful to consider whether the managers of financial firms may be facing any particular difficulties in the enforcement process of the new legislation. Since they have been suggesting that the more complex the regulation, the more expensive its enforcement, it might be useful to examine the operating model of compliance. It is pretty evident that the main concern for the industry next year will be compliance.
Several regulations including the Dodd-Frank Act (US) and the Market in Financial Instruments Directive II (EU), along with the Anti-Money Laundering Directive, have dramatically increased the burden of compliance for financial firms across the world. As a result banks are required to meet new regulatory standards while also improving business strategies. At the same time financial firms claim that the rising cost of compliance might affect their level of competitiveness.
The goal in the upcoming year is to establish suitable standards to optimize the cost of compliance and consequently minimize the risks associated.
Efficiency is the key word to let the banks meet their obligations. Capital efficiency and improved risk management will play a significant role in helping banks meet their obligations, without any need for the firms to raise new capital.
Additionally, transparency with investors will also become an increasing factor to enhance competitiveness because investors demand a safe environment to invest their savings.
Efficiency and effectiveness in compliance are equally important, although the latter is an area where only a limited number of institutions excel in coordinating compliance and consequently maximize their efficiency.
Only transparent transactions bring about effectiveness together with efficiency in the long- term.