Compliance, Banks in a changing world

Compliance, Banks in a changing world

September 3, 2019 0 By Michel Santi


The rise to power of compliance departments in banks can be explained by the fines imposed by regulators and Western, mainly American, judiciaries. After the 9/11 attacks, after the “Patriot Act”, and after the US sanctions on Iran, Russia, certain Mexican agents and anyone who the US unilaterally and in an instant decries as unrespectable, it’s not much less than 30 billion dollars that have been extracted from the global banking system since 2008. For example, the giant fine of 9.5 billion for BNP Paribas, the 2 billion paid by HSBC, the 1.8 billion imposed on Standard Chartered, and this year’s conviction of UBS (that has appealed) for a fine of 4.5 billion euros for tax evasion, which is unprecedented in France. This list is far from exhaustive though as it doesn’t include any Scandinavian banks (like Danske Bank or Swedbank) that have been involved in Russian money-laundering scandals…

Compliance has therefore now become banking’s immune system. This comparison is far from fortuitous as – in fact – the fight against financial crimes, in 2019, falls under a scheme that has similarities with the complexities of the sanguine system. To survive, and to avoid being strangled by a plethora of regulations that cover all domains of banking activity, compliance “services”, that have very quickly been made into “departments”, have had to make recruitments on an industrial scale with the two-part aim of complying with laws and at the same time fighting against the inventiveness of delinquents. As such, in 2019, Citigroup’s 30,000 compliance employees make up 15% of the bank’s whole workforce…compared with 4% in 2008, with JP Morgan Chase tallying up 43,000 employees in its various compliance departments!

Financial institutions therefore spend without counting in order to protect themselves, like Standard Chartered that last year exhausted 20% of its before-tax profits perfecting its compliance processes, or the British banks that in 2019, according to the Financial Conduct Authority, committed 6.5 billion dollars to the various battles against embezzlement of all kinds.In such an environment, it goes without saying that it’s those who find themselves in the eye of the storm that prove to be the most zealous and who publicly display their determination at the top of their lungs, just like Danske Bank who just announced the recruitment of more than 600 compliance specialists. Logically, this very specific branch of the world of banking – once lost in the legal or “risk” services – has grown considerably in terms of visibility since the heads of compliance now have direct access to the Chief Executive Officer. Their remit now covers essential areas like communications with the Board of Directors, the transfer of crucial information to clients and even the rejuvenation of banking culture.

An establishment like BNP Paribas is in fact a pioneer in the promotion of some of its managers from diverse services to compliance, and vice-versa, with the obvious aim being to imbibe the whole bank with the right attitudes, but also to familiarise members of the compliance department with various banking roles, and therefore to sharpen their eye to possible malfeasances or errors committed by their colleagues.Remuneration has of course had to follow suit because the talent experts (internal and external to the banks) who once stuck their noses up at compliance are now being attracted by the salaries that are comparable to those of the bank managers located in the “profit centres”.

However, it would seem that 2019 and 2020 will be the years of “Peak Compliance”, due to the Artificial Intelligence and Big Data Revolutions. HSBC is already planning to assign a bot to each of its clients that would basically act as an informant. Banks are in fact anticipating close partnerships with those known as “Regtech” (like RegBot or Arachnys) whose robots and algorithms will replace humans, accomplish all tasks delegated to compliance, and will be able to master the legal and regulatory workings of a system that will get forever more complex.

The “Dodd-Frank” law is emblematic of this.Promulgated in 2010 in the US, its objective is to prevent the abuses of financial behaviour and to allow the authorities to seize – even to dismantle – establishments of gargantuan size; the too-big-to-fail.However, what swift and effective action can be taken when this law’s text comes to 850 pages, 20 times longer than the well-known “Glass-Steagall” law that was adopted in the aftermath of 1929? On their own, the rules (of the Dodd-Frank law) that are intended to encompass the risky operations undertaken by banks’ own funds – the famous “Volcker rules” – are made up of 382 items and 1,420 sub-items! Some of the explanations and clarifications in this law regarding certain technical matters stretch out over hundreds of pages. Meaning that not even the regulator could claim to have read the law in its entirety…or to have understood it! Even Sheila Blair, former boss of the FDIC (the US regulator), said this reform “is drowning in an ocean of complexity”.

To rehash the sanguine analogy from the start of this analysis, the white cells – making up the core of our organism’s defence system – can turn out to be harmful to the organism, that then becomes leukemic.Care should be taken not to fall into the opposite excess because too much surveillance – like too much regulation – can end up having pernicious effects, and even abet delinquency.

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