Anti-Money Laundering (AML) and Bank Secrecy Act (BSA) compliance incorporate rules called Know Your Customer, also called KYC. These rules are often dreaded by financial institutions. Financial institutions such as non-bank institutions called NBFIs and banks struggle with risk mitigation strategies required. They often enlist third-party vendors to assist them with completing regulatory requirements.
Financial Risk Management: Definition, Risks and Compliance
Financial risk management is the assessing risks to a banking institutions portfolio. NBFIs and FIs requires assessing risks to a bank’s portfolio. Banking institutions working with third-party vendors must determine their cyber risks and their third-party vendors’ security risks. They must also answer to the institutions’ Board of Directors.
In fact, compliance risk often impacts NBFI and FI financial risk too. Determining these liabilities means understanding political market risks and information security risks. NBFIs and FIs also need to address information security as this security risk has become a greater threat to financial institutions than credit risk. This requires an overall asset-liability programs that manage these risks.
What is a risk to financial institutions?
In the past, fraud threats posed the most risks to financial institutions. Therefore, BSA, AML and KYC procedures and policies together with their vendor management oversight gives banking institutions more protection than ever. Here is a little more information about KYC, AML and BSA:
Know Your Customer
Commercial accounts require financial institutions to collect personal information about the owners of the accounts. The institutions must also protect business information such as Tax Identification Number (TIN) and articles of incorporation.
Consumer accounts require KYC procedures and policies to collect customers’ information such as date of birth, addresses, and social security numbers. According to BSA and AML, organizations must document customer data to prove customers were vetted.
Regulatory requirements make it mandatory for banking institutions to keep documents for five-to-seven years. Collected digital information must be scanned using some online account. This results in more customer data remaining on networks and in third-party vendors’ hands.
What Bank Secrecy Act and Office of Foreign Asset Controls (OFAC)
The Bank Secrecy Act (BSA) and Office of Foreign Asset Controls (OFAC) require all banking institutions to continuously monitor customer records to protect themselves from any criminal activity. BSA includes Cash Transactions Reports (CTRs) and Suspicious Activity Reports (SARs). These reports contain personal information. Also, SAR details can’t be shared the financial institution’s Board of Directors. Every month OFAC requires financial institutions to document their Blocked Persons List (SDN List) and Specially Designated Nationals list. These lists can’t include any identifying information.
Enterprise Risk Management and FI Compliance can Overlap
NBFIs and FIs face more compliance risks than other industries. To follow compliance requirements these financial institutions are allowing for more online account openings. These processes require endpoint encryption and security to ensure continuous data protection. This means performing the ongoing diligence for third-party vendors to protect outsourced data.
How Financial Institutions Monitor Vendors
Vendor management has always created a compliance hassle for financial institutions. They must ensure their third-party vendors are solvent and ensure these vendors are information is secure. To comply, many NBFIs and FIs incorporate report reviews such as SOC 1 and SOC 2. These reports along with SOC assist with vendor management practices. However, their monitoring can’t stop there. They must find a management solution that provides streamlines of communication.
What Financial Institutions Must Learn from Blockchain Technology
Machine learning and artificial intelligence, nicknamed “RegTech,” are being adopted by financial institutions. In fact, blockchain is emerging as the technology of the future for financial institutions. Each party’s transactions is blocked by a cryptographic key. This prevents data from be obtained. The full history of the transaction is protected and maintained because of the encryption.
This allows financial institutions to maintain anonymized and detailed transaction histories to prove they are protecting customer information. However, fintech blockchain networks still require third-party vendor monitoring. Financial organizations still need help protecting themselves from cyber criminals. NBFIs and FIs need a single place to store reviews when engaging in third-party vendor due diligence. Many companies can provide the location and tracking of third-party vendor responses. This will allow financial institutions to continue to protect themselves and their customers from security risks while continuing to remain compliant with government regulations.
Ken Lynch is an enterprise software startup veteran, who has always been fascinated about what drives workers to work and how to make work more engaging. Ken founded Reciprocity to pursue just that. He has propelled Reciprocity's success with this mission-based goal of engaging employees with the governance, risk, and compliance goals of their company in order to create more socially minded corporate citizens. Ken earned his BS in Computer Science and Electrical Engineering from MIT.