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Prelims

Sophia Beckett Velez PhD (Walden University, USA)

Compliance and Financial Crime Risk in Banks

ISBN: 978-1-83549-042-6, eISBN: 978-1-83549-041-9

Publication date: 25 March 2024

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Citation

Velez, S.B. (2024), "Prelims", Compliance and Financial Crime Risk in Banks, Emerald Publishing Limited, Leeds, pp. i-xxii. https://doi.org/10.1108/978-1-83549-041-920241014

Publisher

:

Emerald Publishing Limited

Copyright © 2024 Sophia Beckett Velez. Published under exclusive licence by Emerald Publishing Limited

Half Title Page

Compliance and Financial Crime Risk in Banks

Title Page

Compliance and Financial Crime Risk in Banks: A Practitioners Guide

By

Sophia Beckett Velez, PhD

Walden University, USA

United Kingdom – North America – Japan – India – Malaysia – China

Copyright Page

Emerald Publishing Limited

Emerald Publishing, Floor 5, Northspring, 21-23 Wellington Street, Leeds LS1 4DL

First edition 2024

Copyright © 2024 Sophia Beckett Velez.

Published under exclusive licence by Emerald Publishing Limited.

Reprints and permissions service

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No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters' suitability and application and disclaims any warranties, express or implied, to their use.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

ISBN: 978-1-83549-042-6 (Print)

ISBN: 978-1-83549-041-9 (Online)

ISBN: 978-1-83549-043-3 (Epub)

Dedication

To my daughter Shikurah Velez, you are my biggest cheerleader, and I am thankful for your love and support.

To Victor Velez, thank you for believing in me.

To Peter Chidolue SJ, thank you for pushing me when I wanted to give up on my dreams.

To Marjorie Grant my mom whom I love so dearly, thank you for believing in my talents and investing in my education.

List of Tables

Chapter 2
Table 2.1. Compliance Data Source Practices 2nd Round Data: Nonconsensus. 18
Table 2.2. Compliance Reporting Practices 2nd Round Data: Nonconsensus. 20
Table 2.3. Compliance Policy Practices 2nd Round Data: Nonconsensus. 22
Table 2.4. Compliance Risk Identification Practices 2nd Round Data: Nonconsensus. 23
Chapter 3
Table 3.1. Compliance Practices on Forward Looking Science 2nd Round Data: Nonconsensus. 31
Table 3.2. Compliance Practices on Long-Term Strategies 2nd Round Data: Nonconsensus. 32
Table 3.3. Compliance Practices Tests 2nd Round Data: Nonconsensus. 33
Table 3.4. Compliance Practices Periodic Assessment 2nd Round Data: Nonconsensus. 34
Chapter 4
Table 4.1. Compliance Practices on Risk Identification 3rd Round Data: Nonconsensus. 41
Table 4.2. Compliance Practices on Responsibilities Clarity 2nd Round Data: Nonconsensus. 42
Table 4.3. Compliance Practices on Periodic Assessment 2nd Round Data: Nonconsensus. 43
Chapter 5
Table 5.1. Internal Control Practices on Timely Reporting 2nd Round Data: Nonconsensus. 54
Table 5.2. Governance Practices on Basel 1 2nd Round Data: Nonconsensus. 55
Table 5.3. Compliance Practices on Test Measurements 2nd Round Data: Nonconsensus. 56
Table 5.4. Internal Control Practices on Monitoring Assets 2nd Round Data: Nonconsensus. 58
Table 5.5. Governance Practices on Stress Tests 2nd Round Data: Nonconsensus. 59
Table 5.6. Governance Practices on Model Validation 3rd Round Data: Nonconsensus. 61
Table 5.7. Governance Practices on Within Any Stress Test or Ratio Guidelines 3rd Round Data: Nonconsensus. 63
Chapter 6
Table 6.1. Internal Control Practices on Know Your Customer 2nd Round Data: Nonconsensus. 66
Table 6.2. Governance Practices on Program Revisions 2nd Round Data: Nonconsensus. 68
Table 6.3. Compliance Practices on BSA Teams 2nd Round Data: Nonconsensus. 69
Table 6.4. Governance Practices on Cyber Security 2nd Round Data: Nonconsensus. 71
Chapter 7
Table 7.1. Compliance Practices on Test Measures 2nd Round Data: Nonconsensus. 76
Table 7.2. Compliance Practices on Communication 2nd Round Data: Nonconsensus. 77
Table 7.3. Compliance Practices on Compliance Risks 2nd Round Data: Nonconsensus. 79
Table 7.4. Compliance Practices on Remediation 2nd Round Data: Nonconsensus. 80
Table 7.5. Compliance Practices on Periodic Assessment 2nd Round Data: Nonconsensus. 81
Table 7.6. Compliance Practices on Upper Management 2nd Round Data: Nonconsensus. 82
Table 7.7. Compliance Practices on Internal Control 2nd Round Data: Nonconsensus. 84
Table 7.8. Compliance Practices on Training 2nd Round Data: Nonconsensus. 85
Table 7.9. Governance Practices on Vulnerable Areas 2nd Round Data: Nonconsensus. 86
Chapter 8
Table 8.1. Internal Control Practices on Prioritize Training 2nd Round Data: Nonconsensus. 90
Table 8.2. Risk Management Practices on Training Employees 2nd Round Data: Nonconsensus. 91
Table 8.3. Assurance Practices on Thorough Training 2nd Round Data: Nonconsensus. 93
Table 8.4. Compliance Practices on Cyber Security Teams 2nd Round Data: Nonconsensus. 94
Chapter 11
Table 11.1. Compliance Practices on Organizational Objectives 3rd Round Data: Consensus. 115
Table 11.2. Compliance Practices on Clear Definition of Data Sources 3rd Round Data: Consensus. 116
Table 11.3. Compliance Practices on Monitoring and Reporting 3rd Round Data: Consensus. 117
Table 11.4. Compliance Practices on Code of Ethics 3rd Round Data: Consensus. 119
Table 11.5. Compliance Practices on Morals and Integrity 3rd Round Data: Consensus. 120
Table 11.6. Compliance Practices on Right Product 3rd Round Data: Consensus. 121
Table 11.7. Compliance Practices on Understanding Regulatory Compliance 3rd Round Data: Consensus. 123
Chapter 12
Table 12.1. Governance Practices on Strong Board 3rd Round Data: Consensus. 130
Table 12.2. Internal Control Practices on Strong Governance Committee 3rd Round Data: Consensus. 131
Table 12.3. Internal Control Practices on Escalation 3rd Round Data: Consensus. 132
Table 12.4. Internal Control Practices on Communication 3rd Round Data: Consensus. 134
Table 12.5. Compliance Practices on Risk and Control Assessment 3rd Round Data: Consensus. 135
Table 12.6. Internal Practices on Three Line of Defense Use 3rd Round Data: Consensus. 136
Table 12.7. Compliance Practices on Data Source 3rd Round Data: Consensus. 138
Table 12.8. Compliance Practices on Reporting 3rd Round Data: Consensus. 139
Table 12.9. Compliance Practices Code of Ethics 3rd Round Data: Consensus. 140

About the Author

Sophia Beckett Velez, PhD, has worked for over 16 years as a Certified Public Accountant (CPA) with large banks providing consulting services. Her work experience has provided her with valuable background information on the banking industry in general. As a CPA, she worked for firms such as PricewaterhouseCoopers, where she performed financial audits, attestation services, and risk management analysis of large banks. Many of the regulatory compliance problems noted during her review of the large banks required her to cultivate relationships with line of business managers, and work with them to develop action plans and solutions to the issues noted. This has sparked her research interest in exploring the issues at hand in global banks.

Preface

The US and global banking regulators have enforced regulatory compliance laws to minimize (money laundering, terrorist funding, human trafficking, fraudulent banking activities, bad mortgage loans) that exposed banks to significant risks and losses which banks have complained that it is over regulation. This book discusses anti-money laundering standards, counter-terrorist financing measures that are aligned to AML program that cover BSA laws and control activities (prevent, detect, monitor) designed to mitigate breaches.

A qualitative e-Delphi study of 10 banking finance experts were convened to build consensus on compliance practices senior bank managers can implement that can be effective in reducing losses in banks/bank holding companies. This book offers consensus on (a) maintenance of effective and independent compliance consistent with the organizational objectives, (b) clear definition of data source for compliance analytics, (c) compliance monitoring, (d) reporting activities promptly to upper management, (e) top leadership must be a champion of code of ethics, and (f) understanding regulatory compliance activities that are effective.

This book offers an original contribution to the field of banking that undergraduates, master's, PhD students, academics, and researchers can use to gain a deeper understanding of compliance and AML risks in banks and the use of effective management practices. This book will be the first to discuss consensus on effective compliance practices in banks. Sophia Beckett Velez PhD has over 16 years of experience as a Certified Public Accountant (CPA), providing consulting services to large banks.

Sophia Velez 0000-0002-8382-3090

Acknowledgments

This book could not have been written without the support and encouragement of my daughter Shikurah Velez.

Introduction

Outline of Chapters

This book is divided into three parts. Part 1 discusses Regulatory Compliance in Domestic and Global Banks. Part 2 examines Compliance Laws and Requirements (BSA/AML). Part 3 reviews Compliance Environment and Effective Leadership Practices.

Part 1: Regulatory Compliance in Domestic and Global Banks

This part of the book discusses regulatory compliance laws that have placed stress both financially and operationally on large global banks in the United States of America (USA) and around the world. The lack of effective compliance risk management practices to control growth of fraud and money laundering spread throughout the global economy.

Chapter 1: Regulatory Compliance Requirement and Practices

In this chapter, I discuss increased in regulatory compliance laws that have placed stress both financially and operationally on global banks in the United States and around the world business practices. US and global banking regulators have enforced regulatory compliance laws to minimize bank risks (money laundering, terrorist funding, human trafficking, fraudulent banking activities, bad mortgage loans) that exposed them to significant losses which banks have complained that it is over regulation.

Chapter 2: Regulatory Compliance in Global Banks

The US and global banking regulators have enforced regulatory compliance laws to minimize bank risks (money laundering, terrorist funding, human trafficking, fraudulent banking activities, bad mortgage loans) that exposed them to significant losses which banks have complained that it is over regulation. This chapter highlights penalties and punishment issued to banks and other financial institutions for being not in compliance with SAR requirements as noted in anti-money laundering laws that have been astronomical.

Chapter 3: Compliance Requirements in BHC and International Holding Companies (IHC)

This part of the book discusses compliance costs have increased for banks, and regulators have seen an increase in their monitoring costs of these compliance regulations. An in-depth look at some of the significant increases in banks compliance costs are related to complex tracking and reporting systems to meet the enhance compliance requirements.

Chapter 4: Compliance Failures in Global Banks

Global banks have failed to implement an effective compliance program to address regulatory requirements of AML, Basel III, and Dodd Frank 2012 Bill. Banks assigned low-risk rating to high risk countries ignoring serious money laundering risk and opted to have lax AML control, which incentivized drug cartels and money launders to use the bank as their preferred financial institution.

Part 2: Compliance Laws and Requirements (BSA/AML)

This part of the book discusses risk of not meeting government compliance requirement referred to as compliance risk. An in-depth look at banks and financial institutions efforts to prevent themselves from being exposed to receiving penalties due to the business risk exposure of where they transact business (high risk countries, individuals, companies) that are susceptible to the risk of money laundering.

Chapter 5: Implications of Compliance Weakness in Banks and Regulatory Penalties

This chapter discusses banks argument that they lost their competitive edge because they have been cut back on business in some countries to meet AML regulations. Banks have failed to report accurate and complete/updated information that result in them receiving penalties.

Chapter 6: BSA AML Compliance Practices – Ineffective Practices

BSA AML requirements have intensified in recent times to counteract the significant increase in money laundering activities; such as; currency transaction reporting (CTR) thresholds, suspicious activity reporting (SAR), and responses to 9/11 ‘Know Your Customer (KYC) requirements. This chapter examines significant number of banks moved from manual face-to-face know your customer exercise KYC check to an automated process, which turned out to be ineffective.

Chapter 7: Capital Requirements – Ineffective Practices

This chapter discusses capital requirements were highlighted as key risk mitigation measure that banks and SIFIs need to sustain and survive in a financial crisis. OCC made changes to risk weights of the Advanced Approach system, made updates to the market risk rule to exclude credit rating-based risk assessment, introduced additional capital rules, bank capital levels increases, create a Capital Conservation Buffer, and required banks to have additional capital beyond required levels to mitigate ineffective capital practices.

Chapter 8: Training

This chapter discusses the importance of training employees and stakeholders at all levels within banks. The need for training has been highlighted after the continuous passing of new compliance laws and the severity of risk exposure stemming from lack of knowledge.

Part 3: Compliance Environment and Effective Leadership Practices

This part of the book discusses BSA AML practices when implemented within a framework that includes executive management at the governance and board levels. The use of effective leadership can garner success in the banking sector when top leadership acts as a champion of code of ethics.

Chapter 9: Sanctions

This chapter discusses banks actions to ensure they do not violate the various levels of sanctions imposed by international governments. The United States sanctions are imposed against countries, companies, and individuals that banks are prohibited from conducting business.

Chapter 10: Office of Foreign Assets Control (OFAC) Compliance Practices

Office of Foreign Assets Control (OFAC) implements and manages US economic sanctions. This chapter looks OFAC maintains a website which entails countries, companies, and individuals who act on behalf of terrorist that are placed on a blocked person list known as a Specially Designated Nationals (SDN) and Blocked Persons List. Countries that are on a blocked list are prohibited from sending funds to and from these nations.

Chapter 11: Capital Requirements – Effective Practices

This chapter discusses effective compliance requirements such as maintenance of effective and independent compliance consistent with the organizational objectives; clear definition of data source for compliance analytics; ensure compliance monitoring and reporting activities promptly to upper management; top leadership must be a champion of code of ethics; strong morals and integrity; right products for clients; understanding regulatory compliance.

Chapter 12: BSA AML Compliance Practices – Effective Practices

This chapter discusses BSA AML practices when implemented within a framework that includes executive management at the governance and board levels can garner success in the banking sector. An in-depth review of various lines of defenses involved in the monitoring of the compliance environment in the bank which includes: (i) First line of defense are business level executives/managing directors (create policies and procedures, personnel communication); (ii) Second line of defense Chief Risk Officer (monitoring of AML/CFT policies) independent of business line responsibilities; (iii) Third line of defense – internal audit (audit banks activities and report to audit committee) working collectively to create a low-risk control environment.

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