What is bank compliance?
Bank compliance refers to a financial institution’s obligation to implement certain laws, regulations, and internal policies.
“Compliance” is a general term that may encompass a wide range of areas, from financial crime prevention (e.g. Anti-Money Laundering and Know Your Customer rules) to consumer data protection to fair lending practices. But all aspects of bank compliance are important and help to ensure that banks safeguard their customers’ interests and contribute to the overall stability of the financial system.
Regardless of their size, all banks must establish robust compliance frameworks to ensure adherence to regulatory requirements.
Key banking regulatory frameworks
Modern banks operate under a complex network of regulatory frameworks and supervisory expectations. They govern various aspects of the banking business, including conducting financial transactions, verifying customer identities, safeguarding collected data, and maintaining liquidity. Here are some of the key regulatory frameworks and obligations that affect banks globally.
AML and KYC requirements
Regulations such as the Bank Secrecy Act (BSA) in the US and the Anti-Money Laundering Directives (AMLDs) in the EU require banks to implement procedures for customer identity verification, transaction monitoring, and suspicious activity reporting.
As part of their duties, financial institutions must perform ongoing risk assessments. These help to identify and mitigate their risk of engaging with individuals or entities associated with money laundering, tax evasion, fraud, or terrorist financing.
Similar AML obligations exist globally, guided by the Financial Action Task Force’s (FATF) recommendations.
Sanctions compliance
Banks must screen customers and transactions against sanctions lists maintained by regulators and authorities like the US Treasury Department’s Office of Foreign Assets Control (OFAC), the EU, or the United Nations Security Council.
Engaging with sanctioned individuals, entities, or countries can result in severe fines and legal penalties. To comply with sanctions laws, banking institutions are required to implement robust screening programs that include:
Consumer protection laws
When conducting business, banks must ensure they provide fair, transparent financial services and avoid abusive or discriminatory practices.
For example, regulators such as the Consumer Financial Protection Bureau (CFPB) in the US enforce rules to protect consumers from unfair, deceptive, or abusive financial practices. Similar frameworks exist in the EU and the UK, where regulators and national competent authorities require banks to ensure transparency in lending, fees, and disclosures.
Capital and liquidity requirements
After the 2008 financial crisis, regulators worldwide introduced stricter compliance requirements to ensure banks remain solvent under different risk scenarios. As a result, under global frameworks like Basel III, banks must now maintain sufficient capital buffers and liquidity ratios to withstand financial stress.
Supervisory authorities such as the Federal Reserve (US), the European Central Bank (Eurozone), and the Prudential Regulation Authority (UK) enforce these standards to minimize the systemic risk and ensure the long-term stability of the financial system.
Data privacy regulations
Banks must comply with data privacy laws like the EU’s General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA).
These rules govern how banks collect, process, store, and share personal information, and require safeguards to ensure data security and customer consent. Furthermore, they improve transparency in the bank-customer relationship by giving the latter the right to know what personal data is being processed, where, and for what purpose.
What an effective bank compliance program looks like An effective bank compliance program is risk-based, proactive, and embedded into the organization’s culture. It relies on various components, such as:
Compliance risk assessment. This is a procedure for identifying potential regulatory and legal risks across products, services, customers, and geographies.
Development of policies and procedures. Based on a risk assessment, the bank develops formal policies and procedures to remain compliant with applicable rules. These include AML, consumer protection, data privacy, and sanctions regulations. The policies should be regularly reviewed and updated to reflect regulatory changes and emerging threats.
Establishment of internal governance and oversight structures. The bank assigns roles and responsibilities across its compliance function, including appointing a designated Chief Compliance Officer (CCO) with sufficient authority and independence. It also establishes direct reporting lines to senior management or the board for oversight and accountability.
Implementing monitoring systems and risk controls. The institution adopts compliance software to automate procedures such as customer identification, transaction monitoring, and risk assessments. These tools help with timely detection of potential compliance risks and support ongoing monitoring.
Regulatory reporting. Banks must submit timely reports of suspicious activities to regulators (e.g., through filing Suspicious Activity Reports) and retain supporting documentation so that it’s available upon request.
Internal auditing procedures and compliance training programs. Banks must ensure that their compliance procedures are up-to-date and independently tested through an internal or third-party audit. Comprehensive compliance training of relevant teams is also integral to ensure everyone understands how to respond to compliance risks and evolving threats.
Compliance risk management in banking
Compliance risk management in banking is the process of identifying, assessing, managing, and monitoring risks related to non-compliance with laws and internal policies. It reduces the likelihood of regulatory penalties, legal consequences, financial loss, and reputational damage.
The process begins with risk identification across products, services, customers, and jurisdictions to pinpoint vulnerable areas where compliance breaches could occur. Institutions then assess the risks’ likelihood and potential impact, categorize them by severity, and implement mitigation controls — including policies, automated controls, training, and oversight mechanisms.
In structuring compliance oversight, banks often rely on the Three Lines of Defense model:
The first line includes business units that own risks directly and manage day-to-day compliance.
The second line designs the compliance framework, sets policies, and monitors adherence.
The third line includes objective internal auditing to provide independent assurance of the first two.
The bank then reports to the board, audit committee, and regulators about the effectiveness of the compliance framework and its application.
Compliance risk management is also integrated with enterprise risk management (ERM) to provide a holistic view of all operational, financial, legal, and reputational risks. This integration helps prevent compliance from operating in a silo and aligns it with the bank’s broader risk appetite, governance framework, and strategic objectives.
How bank compliance is evolving in the digital age
The digital age has dramatically changed the landscape in which banks operate, prompting them to reimagine their compliance procedures.
To enhance efficiency, accuracy, and scalability, banks are increasingly adopting regulatory technology (RegTech) solutions that leverage artificial intelligence (AI) and machine learning (ML). These technologies help banks streamline manual processes and mitigate non-compliance risk.
By using RegTech solutions, banks can also optimize the allocation of their resources. First, automation helps reduce compliance costs and reduces the risk of human error (though human checks are sometimes still necessary). Furthermore, by handling low-to-moderate risk cases effectively, they make the bank more agile, allowing compliance teams to focus more of their efforts on high-risk cases.
Regarding AML and KYC procedures, RegTech solutions can significantly improve the customer’s experience throughout the entire lifecycle, including reducing onboarding times and streamlining initial and ongoing identity verification procedures.
Challenges and best practices for modern banks
Modern banks face several key compliance challenges, including:
Growing regulatory complexity. Frequent updates across jurisdictions require banks to stay current and capable of quickly adjusting internal processes.
Cross-border compliance. Banks operating across various jurisdictions must navigate differing AML, KYC, tax, and data privacy regulations in each country they are present in, which can strain their resources.
Emergence of new asset classes. The growing popularity of cryptocurrencies has naturally made them a part of some banks’ offerings. However, it has also imposed more stringent compliance requirements in line with regulations such as the Markets in Crypto Assets Directive (MiCA) in the EU.
Increased transaction volumes, including with high-risk jurisdictions. The growing rate of digitalization and financial service penetration in countries with less stringent regulations means banks should pay more attention to potential suspicious activities.
An expanding risk environment and range of threats. As technology evolves, so does the arsenal of cybercriminals and fraudsters, exposing banks to increased financial crime risk.
Increasing competition. With the rise of fintech service providers (e.g., neobanks and neobrokers), banks must balance regulatory compliance with efforts to maintain a competitive advantage. Though it must be said that strict compliance is its own form of competitive advantage.
According to the Bank of International Settlements, compliance risk management should be a central pillar of a bank’s identity, and a common principle at all organizational levels. To achieve this, banks should integrate compliance into their strategic planning rather than treating it as a separate function or a simple check-box exercise.
Bank compliance FAQs
Does the size of a bank affect its compliance requirements?
Yes, the size of a bank does affect its compliance requirements. Larger institutions, such as global systemically important banks (G-SIBs), face stricter regulatory expectations and must implement more complex compliance programs. Smaller financial institutions, like community banks, may have simpler frameworks but still must meet core regulatory standards.
What are the consequences of compliance failures for financial institutions?
Non-compliance can have severe consequences for a bank, including fines, legal action, business restrictions, license revocations, and reputational risk. Depending on the jurisdiction, compliance officers can be subject to personal liability and face civil or criminal charges, including fines, or imprisonment.
How are compliance responsibilities usually structured within a bank's org chart?
Compliance responsibilities in a bank typically fall under the oversight of a Chief Compliance Officer (CCO) who reports to senior management or the board. Compliance teams are led by departmental compliance officers who work closely with legal and risk management teams. The board or audit committee provides oversight and ensures regulatory accountability. This structure ensures that the compliance program can cover the five crucial procedures for successful compliance: identification, prevention, monitoring, resolution, and advisory.
