Banking is a heavily regulated business sector, with stiff requirements to manage liquidity, financial reporting, cybersecurity, business continuity, and more. Managing that compliance burden is challenging, but failing to comply with those obligations can result in monetary penalties, operating restrictions, bad publicity, and even lawsuits.

Given all that, banks need to conduct regular compliance risk assessments to identify, evaluate, and mitigate emerging risks. This article will review the importance of compliance risk assessments for banks, the most common compliance risks that banks face, and how banks can enhance their risk management strategies.

What Is Compliance Risk in Banks?

“Compliance risk” refers to the risk of legal or regulatory sanctions, financial loss, or damage to reputation that can arise from a bank’s failure to comply with laws, regulations, and industry standards related to banking products. This includes risks associated with anti-money laundering (AML), know-your-customer (KYC) requirements, data privacy, consumer protection, and other areas.

Banks manage compliance risk by implementing policies and procedures to assure that they comply with applicable laws and regulations. They also manage compliance risk by conducting regular monitoring and testing to detect and address potential compliance issues.

A well-developed compliance management system, complete with effective risk controls, establishes and communicates compliance responsibilities to employees, the board of directors, and senior management. Such a system incorporates legal requirements and internal policies into the bank’s business processes, and ultimately improves the effectiveness of compliance management programs.

What Is a Banking Risk Assessment?

A banking risk assessment is a process by which a financial institution assesses the potential risks it may face in conducting its business activities. The risk assessment identifies and analyzes high-risk areas; evaluates the likelihood and potential damage of those risks, as well as the bank’s overall risk appetite; and develops risk mitigation plans.

The primary goal of a compliance risk assessment is to assure that a bank can operate safely while protecting the interests of its stakeholders. The risk assessment is crucial for identifying security and operational risks and then developing risk management programs.

Common Compliance Risks for Banks

The following compliance risks should be a high priority for any bank.

  • Data privacy and cybersecurity breaches. Data privacy practices assure that a bank protects customers’ personally identifiable information (PII) while conducting transactions. Cybersecurity is even broader, meant to protect all the bank’s electronic processes from disruption by unauthorized parties (including unauthorized employees) The absence of robust cybersecurity procedures and internal controls within banks can expose the bank to risks ranging from data breaches and financial fraud, with the risks of regulatory sanctions and civil lawsuits close behind.
  • Anti-Money Laundering (AML) violations. AML compliance refers to processes, regulations, technological solutions, and other initiatives that combat money laundering efforts, keeping illegitimate funds from entering legitimate financial flows. Banks found guilty of AML violations can face significant legal and regulatory consequences, including fines and reputational damage. In 2019, 61 percent of penalties levied against banks were the result of non-compliance with AML regulations.
  • Customer Due Diligence (CDD) failures. A bank’s failure to authenticate its customers’ identities, and to understand their business activities, financial transactions, and risk exposure, are referred to as CDD failures. Inaccurate client identification and verification, poor record-keeping, and inadequate customer transaction monitoring are the most common causes of CDD failures.
  • Consumer protection violations. Federal and state laws require banks to treat all customers fairly. This means taking steps to avoid consumer harm through discrimination, deceptive practices, unfair fees, or other forms of mistreatment. Consumers should receive up-to-date information from banks about new products and services, which must be easily accessible, simple to understand, and not deceptive. Banks violating consumer protection laws can suffer damage to their reputation and regulatory enforcement, which might result in a loss of clients and business opportunities.

Manage Compliance Risk with ROAR

One crucial step in managing compliance risk is identifying all the risks associated with a particular task or operation. Once those risks have been identified, appropriate controls can be implemented to mitigate them. But relying on spreadsheets, emails, and other manual processes to identify your risks is time-consuming and error-prone; banks need a better way.

Enter the Reciprocity® ROAR Platform, a governance, risk management, and compliance (GRC) software tool that streamlines compliance management by automating those manual tasks.

In addition, ROAR delivers complete visibility into how your compliance efforts affect your residual risk position. It also helps you identify and mitigate compliance gaps to assure ongoing compliance with regulatory requirements, including regulations such as the EU General Data Protection Regulation (GDPR), California Consumer Privacy Act (CCPA), and more.

Schedule a demo and see how ROAR can improve your compliance management.