Compliance

FINANCE AND BANKING / by Miguel Gallardo Guerra

In an increasingly interconnected and regulated world of finance, compliance has become a fundamental cornerstone not only for financial institutions but also for organizations across all sectors. Due to the growing complexity of regulations and pressure from regulators and society, these entities must adhere to both local laws and international standards. 

The term “compliance” refers to the procedures and controls financial institutions must implement to ensure they adhere to each jurisdiction’s relevant laws, regulations, and regulatory standards. This means taking a multidimensional approach in the global context, as each country or region may have varying regulations, adding complexity to compliance programs. Global financial institutions must ensure their operations adhere to international standards and local laws.

a) Regulatory Compliance (AML/CFT Regulations)

 Compliance with Anti-Money Laundering (AML) and Terrorist Financing (CFT) regulations is one of the main pillars of compliance. Financial institutions must implement strict controls to prevent their services from being used for illegal activities. Global organizations like the Financial Action Task Force (FATF) set standards that countries must follow, requiring banks and other financial institutions to meet specific requirements, such as:

• KYC (Know Your Customer): This process involves identifying and confirming the customer’s identity. Financial institutions must gather customer information to prevent money laundering and ensure that funds are not used for illegal activities.
• Transaction monitoring: Banks must have systems to continuously monitor financial transactions, detecting suspicious or unusual patterns that may indicate possible illicit activities.
• Suspicious activity reports: Financial institutions must report a transaction to the competent authorities (such as the UIF-Mexican Financial Intelligence Unit) if a transaction appears suspicious. Failure to do so may result in severe penalties.

In addition, financial institutions must ensure that they do not conduct transactions with individuals or entities that appear on international sanctions lists, such as those drawn up by OFAC (Office of Foreign Assets Control) in the United States or the European Union. This includes continuously monitoring and updating internal databases to prevent transactions with sanctioned individuals. In Mexico, these lists are the Blocked Persons Lists for the financial sector or the Lists of Related Persons for entities regulated by the Federal Law for the Prevention and Identification of Operations with Illicit Proceeds.

b) Data Protection (GDPR and Local Regulations)

Protecting personal data is another crucial compliance component. In the European Union, the General Data Protection Regulation (GDPR) has established a rigorous legal framework on how companies must manage, store, and process their customer’s data. Financial institutions operating in the EU or handling information of European citizens must comply with the following requirements:

• Explicit consent: Companies must obtain customer consent to process their data.
• Right to be forgotten: Customers can request that their data be deleted.
• Transparency: Financial institutions must be fully transparent about collecting and using customer information.
• Security breach notification: In a data breach, companies must notify the authorities and affected customers within a noticeably brief period (usually 72 hours).

Although GDPR is the most famous regulation, numerous other countries have data protection laws (such as Mexico’s Federal Law for the Protection of Personal Data in Possession of Individuals), requiring global financial institutions to align with various regulations based on their operating region.

c) Regulatory Compliance in Financial Services

In international banking, financial institutions must comply with various regulations specific to the financial services industry. This includes regulations such as:

• MiFID II (Markets in Financial Instruments Directive) in Europe, which regulates securities markets and seeks to protect investors, ensuring transparency in financial transactions and services.
• The Dodd-Frank Act in the United States has a broader focus but includes specific provisions to protect consumers, increase oversight of financial institutions, and regulate derivatives markets.

To ensure compliance with these regulations, financial institutions must implement internal policies that address aspects such as adequate disclosure of risks to investors, management of conflicts of interest, and proper supervision of their operations in the capital markets.

In Mexico, regulatory compliance is ruled by a sturdy legal framework that constantly seeks to align with international standards. Some principal regulations are the Credit Institutions Law and the Stock Market Law. In addition, the Mexican financial system includes a variety of specialized regulations for each sector.

d) Corporate Governance

Corporate governance plays a crucial role in compliance with international standards. A good compliance program requires the existence of a clear corporate governance structure with:

• Defined roles and responsibilities: Each level within the organization should have specific compliance-related responsibilities. This includes the creation of compliance committees and the appointment of compliance officers.
• Independence of the compliance team: The compliance department must be independent of other company areas to ensure that commercial interests or internal conflicts do not influence its decisions.
• Compliance culture: Financial institutions should promote a corporate culture that values regulatory compliance. This includes ongoing employee training and implementing internal policies that promote transparency and accountability.

e) Compliance in Fintech and New Technologies

The fintech sector has introduced innovations that challenge traditional regulations, and financial institutions working with these technologies must ensure that they comply with applicable regulations. This is particularly relevant in areas such as:

• Cryptocurrencies: The growing popularity of cryptocurrencies has led to the creation of new regulations in many jurisdictions. Banks and other financial institutions wishing to trade cryptocurrencies must ensure compliance with AML/CFT and data protection regulations.
• Electronic payments: With the expansion of digital payment platforms, governments have regulated the companies that provide these services, especially consumer protection and transaction security.
• Open Banking: Open banking regulations in the European Union and other countries require banks to share customer information with authorized third parties, provided they have the customers’ consent. Financial institutions must protect shared information and comply with data protection regulations.

f) Sanctions for Non-Compliance

Non-compliance with regulations and standards can have severe consequences for financial institutions. Penalties vary by jurisdiction and type of non-compliance, but may include:

• Significant fines: For example, banks that fail to comply with AML/CFT or data protection regulations can face multi-million-dollar fines.
• Suspension of licenses: In severe cases, regulators may suspend or revoke a financial institution’s license to operate in each jurisdiction.
• Reputational damage: Non-compliance with regulations has financial consequences and can seriously damage an institution’s reputation, resulting in the loss of clients and investors.

g) Incorporation of innovative technologies

Financial institutions are adopting innovative technologies to improve their compliance programs, so artificial intelligence and data analysis are becoming key tools for detecting suspicious patterns in transactions and automating verification processes. These technologies allow entities to comply with regulations and anticipate non-compliance, minimizing risks and improving operational efficiency. 

Adequate regulation is therefore required to reduce the risk of these tools being used for illicit activities, compromising the general public’s confidence and the financial system’s stability. Therefore, it is critical that regulators and stakeholders collaborate to develop regulatory frameworks that address current challenges and anticipate future risks, thus ensuring a safe and responsible financial environment.

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Conclusion

Compliance in international finance and banking is a complex and constantly evolving area. Financial institutions must implement policies, procedures, and technologies to comply with global regulations and standards. This implies adhering to local regulations and international laws that seek to prevent money laundering, terrorist financing, and other illicit practices. 

Organizations should invest in the training and development of their employees and adopt advanced technological tools to facilitate risk monitoring and management. Only through an initiative-taking and adaptive approach will institutions be able to maintain the trust of their customers and shareholders, thus ensuring their sustainability and success in the global financial environment.

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