Not often would one think to tie a bank and a supply chain together, but the supply chain is everywhere – even in the banking industry.
Managing compliance risks in the banking industry has long been central to banking operations. But the nature of those risks has expanded and evolved – and so have the strategies that banks must adopt to stay ahead of both internal and external compliance challenges.
For example, banks today must grapple not just with conventional compliance risks, like an obligation to identify money laundering, but also with risks that originate from within the supply chain in the banking industry.
Compliance And Banking: The Traditional Approach
In the old days, compliance for banks was relatively simple. It included two key components:
External Compliance. This involved adhering to compliance rules set by regulators or other external groups. On this front, activities like anti-money laundering were banks’ main priority.
Internal Compliance. This meant the establishment of internal systems necessary to identify and adhere to regulatory risks. These internal systems typically weren’t specifically mandated by regulators, but banks implemented them as a means of complying with external regulations.
Whether externally or internally, banks’ traditional approach to compliance was essentially reactive. Businesses focused on detecting and responding to risks, rather than preventing them proactively.
The Challenges Of Banking Compliance And Supply Chain Management
Those days of traditional compliance for banks are over. Today’s compliance landscape within the banking industry looks quite different.
Terrorist Financing: As the IMF notes, “the international community has made the fight against money laundering and the financing of terrorism a priority.” This change has raised the stakes surrounding anti-money laundering compliance for banks and increased the pressure they face from regulators around the world in this area.
Bribery & Corruption: Along similar lines, “the past decade has seen the emergence of anti-corruption compliance systems in companies across the globe,” according to the OECD. Here again, banks face heightened pressure to establish compliance processes that can mitigate activities related to corruption.
Internal & External Fraud: These risks have seen an increase to the tune of 218 percent during 2022 alone, according to TransUnion.
Business Continuity Risks: The need to ensure that banks can remain operational in the face of unexpected disruptions – such as problems within the supply chain in the banking industry – has been a continued challenge for finance compliance officers to master.
Information & Cyber Security Risks: Last but not least, cyber security incidents continue to surge, creating a pervasive compliance challenge for banks.
For all of these reasons, banks today require compliance strategies that are capable of addressing a much broader range of risks than traditional money laundering. At the same time, they must be able to track and mitigate not just those risks that originate internally, but also risks that arise from within their supply chains – such as insecure software provided to banks to third-party vendors, or lack of compliance adherence by a bank’s partners.
Modernizing Compliance And Supply Chain Management In Banking
To meet those challenges, banks must turn to new practices that can supercharge their approach to compliance, such as:
RegTech: RegTech refers to a new breed of IT tools – including supply chain risk management solutions like Findings – that can help banks to streamline and automate compliance operations.
Proactive Compliance: Mandates like SEC Rule 30 require banks to think and act more proactively than they did in the past by establishing plans for dealing with risks ahead of time. Reactive compliance no longer cuts it.
Risk Mitigation Playbooks: In a similar vein, banks should establish “playbooks” that spell out how they’ll react to particular compliance risks or incidents. By establishing playbooks ahead of time, banks can remediate problems much more efficiently when they arise.
Next-generation AML: Anti-money laundering remains a pillar of banking compliance, but as noted above, modern AML must be more expansive than in the past. It must extend to domains like preventing terrorist financing and corruption – and not just among clients that banks deal with directly, but also within the banking industry supply chain.
Reporting: Banks must double down on their approach to compliance reporting by ensuring that they have processes in place to disclose vulnerabilities through a VDP and violations promptly in order to comply with mandates like FINRA Rule 4530.
Regulatory Penetration Testing: Regulatory penetration testing can help banks to identify risks proactively, rather than waiting for real-world violations to occur before they take action.
Put simply, modern banks must adopt more actionable, efficient and comprehensive compliance strategies, and they must ensure that they can enforce compliance across the entire banking industry supply chain.
Compliance solutions like Findings can help. By providing end-to-end visibility into supply chain operations and the compliance status of third-party vendors and suppliers, Findings makes it easy to detect risks in real time, then take action before the risks trigger compliance violations.