Why Banks Struggle with Cross-Border Compliance
Banking has evolved considerably over the past few decades. In the 1980s, banks focused primarily on receiving deposits and providing loans through its branches, and customer interaction was typically done face-to-face. Customers met with financial advisors for guidance on financial planning and investments, and banking transactions typically stayed within the country, involving mainly domestic interests.
Fast-forward to the 1990s and beyond, access to technology has inevitably made the world smaller, resulting in a more sophisticated banking customer with high expectations for faster and more personalized self-services, real-time account updates, and international banking services available via online or mobile. Nowadays, most people rarely ever set foot in a bricks-and-mortar bank branch, preferring the convenience and efficiency of online and mobile banking anytime, anywhere.
As a result of this dynamic shift away from traditional in-person domestic banking to more remote digital international banking, banks are faced with many challenges. Not only must they replace outdated technologies and infrastructure, but they must also keep up with the ever-changing regulatory landscape in each country where they do business.
International Banks Faced with Heavy Penalties
In 2015 alone, nearly $1.3 billion in fines have been levied against banks from around the world by the UK’s financial regulator, the Financial Conduct Authority (FCA). There are numerous American regulators with the ability to impose financial penalties, but the Office for Foreign Asset Control (OFAC) with the U.S. Department of the Treasury alone has levied $600 million in fines over the past year.
The reasons for these huge fines is varied, ranging from failure to apply enhanced due diligence processes for politically exposed persons (PEPs) to doing business with countries on international sanctions lists to failure to report transactions. Other cases often occur as a result of a failure to implement sufficient controls to satisfy regulatory requirements.
Regional Differences in Regulatory Requirements
The challenge to achieve global compliance faced by financial institutions is further complicated by the reality that there are still significant differences in the regulatory requirements from one country to another. Take for example, in the U.S., regulations have become extremely strict in recent years after the scandals that resulted in the worldwide financial crisis in 2008. New laws, such as the Dodd-Frank Act (Dodd-Frank) and the Foreign Account Tax Compliance Act (FATCA), have been enacted in an effort to bring foreign banks in line with the regulatory requirements already in place for U.S. domestic institutions.
The European Union (EU), due to its monolithic structure, has been relatively slow in keeping up with precedent set by the U.S. in terms of strengthening its regulatory regime. Its second Markets in Financial Instruments Directive (MiFID II), adopted by the European Parliament in April 2014 after more than two years of vigorous debate, is considered to be equivalent to Dodd-Frank. MiFID II is expected to be fully implemented throughout the EU by early 2016, but this date will be dependent upon when each of the individual EU members will be able to enact their own laws that will bring the necessary measures into force within each country. The complexity of EU policy making is a strong contributing factor to the delays in aligning industry regulations.
In Asia-Pacific (APAC), there are different challenges to overcome. Unlike in Europe, there is no collective group like the EU that provides a regulatory framework for all countries in the region to follow. Each APAC nation makes their own independent policy decisions regarding financial regulation with little or no overlap with other countries. Additionally, the situation is further complicated because the regulations for many of these countries are not available in a common language, such as English.
Risks from a Lack of Regulatory Convergence
With variations in how regulations are managed from one jurisdiction to another, the impact is beginning to be felt in financial markets. As a result of tougher American rules for dealing with over-the-counter (OTC) derivatives, the International Swaps and Derivatives Association (ISDA) reported that European dealers and banks have moved away from U.S. markets. Additional research from the ISDA also found that several non-U.S. platforms decided that it was easier to ask U.S. customers to stop trading on their platforms or to split their businesses between U.S. and non-U.S. assets.
Such disparities between countries and regions can have a serious impact on foreign investment. If cross-border trading in international equity is discouraged, then global economic growth could be impeded.
The Regulatory Rifts
Fortunately, policy makers around the world recognize the need for greater regulatory convergence. The EU published its fourth Anti-Money Laundering Directive (AMLD IV) in June 2015, which aims to bring its member countries’ anti-money laundering (AML) regimes closer in line with that of the U.S. Some of the key changes include adopting a more risk-based approach, new processes for determining eligibility for simplified due diligence, and more public officials to be included in the PEP definition.
Other countries have taken a different direction. Australia’s corporate, markets, and financial services regulator, the Australian Securities & Investments Commission (ASIC), has provided a regulatory guide that explains the principles that it follows for cross-border financial regulation. Among these principles, ASIC states that it provides conditional relief from certain Australian regulatory requirements to foreign financial service providers. The regulator also seeks similar relief from foreign requirements for Australian providers, where possible.
What will be the biggest challenge for cross-border compliance in 2016?