Corporate Taxes in Germany

Continuous monitoring and communication between regulators and banks provide a backdrop to compliance management.

Just as well, one operational requirement for banks is to report activities that contravene set policies and laws. It is integral to the financial institutions’ market and is the reason behind banking regulations.

  1. What is a regulatory compliance check?
  2. Why do you need a regulatory compliance check in banking?
  3. What happens during a regulatory compliance check?
  4. What if you cannot comply for whatever reason?
  5. How can the compliance department help banks to avoid the consequences?
  6. Requirements for regulatory compliance
  7. Improve and reduce the cost of regulatory compliance
  8. Final Thoughts

What is a regulatory compliance check?

A regulatory check is a process that seeks to ensure compliance with regulations, laws, and policies in the banking sector.

According to the law, banks must check for compliance with various laws and legislation. That is true whenever a company seeks to conduct a transaction. The checks are in place to ensure companies, businesses, and individuals comply with relevant rules, policies, and laws regarding data security and overall financial safety.

The compliance check is, therefore, a process put in place to ensure companies do not engage in things like tax evasion and money laundering.

Why do you need a regulatory compliance check in banking?

The question of why you need a regulatory compliance check in banking relates to how tightly regulators oversight the banking industry. Any business looking to transact with a financial institution or within the financial market must undergo a regulatory check.

Why is this important?

Since the 2008 financial crisis, tighter and tighter laws and regulations have been put in place to check against things such as to conduct risk and Anti-Money Laundering (AML). Let’s expound on that.

A compliance check is necessary for any company, especially given the complexity of the financial market. An organization needs to comply with guidelines set out in laws such as the Banking Secrecy Act. It makes it easier for them to avoid running into regulatory problems stemming from non-compliance.

Disregard data security, for instance, risks compromising not only your company but the rest of the system. Or let’s say a company engages in some sort of illegality that goes against laid down policies and rules. As part of the sanctions and penalties, authorities can shut down your business operations or freeze financial accounts.

A top-level manager will know this and thus seek to remain compliant.

Here is why you need to go for a compliance check:

  • Provides an advisory platform you can use to better understand what ethical, health and environmental issues can impact your company
  • Transparency ­­­- all the documentation and reporting makes for transparent operations
  • Data security and reliability – rigorous checks provides for preventive and corrective strategies
  • Legal matters – you need checks against AML and terrorism financing
  • Great as a risk management tool – non-compliance impacts brand reputation, especially if legal issues that arise interfere with customers

What happens during a regulatory compliance check?

Generally, a compliance check will involve these measures:

  • Disclosure of all relevant information and documents
  • An examination of all the documents, permits, and reports to ensure they tie up with current guidelines and are valid.
  • A regulator then moves to secure permits and warranties that confirm regulatory compliance
  • Banking regulators then contact relevant regulatory agencies or enforcement bodies for clarification and authentication of issued compliance documents.

The compliance process might not be that straightforward in case a transaction is deemed high risk. It is even so if you consider that laws and regulations keep evolving as new financial instruments enter the market. It may thus force a financial institution to dig deeper to ensure compliance.

In this case, the bank’s compliance department will contact local government authorities for input regarding whether a company is likely to remain compliant at a given time in the future.

What if you cannot comply for whatever reason?

As noted above, the consequences of non-compliance can be damaging to a business. That won’t just be in terms of customers. Stringent fines and other penalties can cripple you financially. That, of course, can be due to any measure – from your accounts being frozen to an outright shutdown.

Other than regulatory obligations coming with very stringent sanctions and penalties, a company must be ready to ensure they are always compliant. Always have a timely review of your compliant status and take action where and when needed. For many people, putting in place a compliance mechanism and investing in new technology offers an opportunity to monitor things.

New trends like the use of Artificial Intelligence (AI) and automation are also considerations for future compliance checks.

Where you find you cannot stay compliant, provide documents that support your effort to comply and seek help from compliance professionals.

How can the compliance department help banks to avoid the consequences?

Banks adopt different operational strategies. But all of them have been working hard to have a professional compliance department, which acts as the internal police unit. This unit’s primary duty is to ensure that they comply with all the relevant banking rules, regulations, and laws. As such, the department plays a central role in helping banks to avoid the consequences mentioned above.

Some of the leading roles that the unit plays to ensure compliance are:

Ensure effective communication between bank-departments

All bank departments need to be informed about changes in laws, regulations, and rules. The compliance department has the resources to gather information from credible sources and pass it across to ensure compliance.

The compliance unit also needs to ensure that all the bank departments understand what to provide whenever the regulator requires additional documentation. They should also have other essential pieces of information, such as the time frame in which the documents need to be prepared and submitted. Many company departments lack the information and need the help of the internal police unit to realize the goal.

Oversee operations requirements

Banks have special operation requirements, but many departments often ignore them. Once banks acquire the license to start operating, many departments consider that the regulator may not take action against them. The operational requirements include:

  • APRs and fees are within the required limits
  • Maintain privacy
  • Supply customers with the required information in time
  • Ensure customers understand their rights

Monitor compliance

The compliance department should also help the bank to comply with the requirements in time. To do that, it needs to send reminders to the concerned person before the due date. Besides, it should keep track of the compliance the institution has missed and prioritize their completion.

Monitor client activities

Besides focusing on the bank’s activities, the department has the responsibility to monitor clients’ activities, such as their transactions. Like banks, customers are required to operate within the confines of the law. The purpose of monitoring the activities is to determine if they are engaging in illegal acts like evading taxes and money laundering and reporting to the authorities immediately.

Requirements for regulatory compliance

There are several requirements for regulatory compliance within the banking sector. The most important challenges and requirements are highlighted below.

  • Within the international financial sector, Europe, and Asia, compliance regulations are always changing. These changes occur often especially within Europe, which makes compliance challenging. Therefore, financial institutions of different sizes are required to have the necessary personnel and departments to accommodate regulatory requirements.
  • Risk management is another important requirement. Almost all jurisdictions from around the world require a bank to have a proper risk management scheme that ensures risk detection and an adequate method of reporting recorded risk. This mechanism is crucial is risk is inherent within the financial sector.
  • Money laundering is another problem faced by most banking institutions. Therefore, banks must have sophisticated systems that track all the money that come into the financial system. Banks that are unable to effectively control money laundering are liable when such an offense occurs. There is a clear example of money laundering that occurred within Europe when the European Central bank went ahead and revoked the license of a particular bank for violating money laundering requirements. Many top banks within Europe were also affected even though they had no idea that money was being funneled through their systems.
  • Another requirement for banks is the reporting format of financial activities. Each bank that operates within a particular country or jurisdiction must adhere to the requirements within the location. Therefore, banks that operate within multiple jurisdictions must develop a complicated system of reporting financial activities that comply with the requirements of each location.
  • General data protection regulation is another regulatory requirement that banks must adhere to. Since banks handle a lot of data, they are required by law to store the data of their clients according to a specific guideline to ensure trust and security of such data.

Improve and reduce the cost of regulatory compliance

There are several ways the bank can improve regulatory compliance and reduce its overall cost. These ways are highlighted below.

  • The bank must ensure that all its compliance programs adhere to the standards of the industry. Doing this allows for periodic changes and the review of the system.
  • Create a regulatory compliance system that is clear, actionable, and easy to implement.

Ensure that compliance schemes are active across the business to allow for adaptation and compliance.

Final Thoughts

All banks need to comply with all the relevant laws and regulations. One of the best ways to ensure financial institutions do not miss deadlines is to equip their compliance departments with the necessary tools, resources, and skills. Banks cannot debate about this because the cost of compliance is lower than that of non-compliance.

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