Over the past years, banks have made drastic changes in risk management. This is largely in compliance with regulations such as the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML). Basically, both the BSA and AML are part of the rules called Know Your Customer (KYC).
Risk Management Software for Banks
The Risk Management Software is designed to identify and monitor risks that pose a threat in organizations. Since banking institutions cannot afford to make any mistakes, they use the risk management software to monitor IT risks and breaches to data.
Financial institutions such as the Non-Bank Institutions (NBIs) and the banks struggle with compliance with the risk mitigation regulations that are required. Normally, most of these institutions will seek the help of experts to assist them with completing the requirements.
Risks that Financial Institutions Face
Banks operate in an environment that has numerous risks. Some of these risks include a change in the expectations of consumers, cybersecurity threats, changes in data privacy and compliance, political events, fraud threats and changes in world events. Can you imagine the serious damages that these risks can cause if they are not properly managed?
That is why; regulations such as the BSA, AML and KYC policies are designed to protect banking institutions. Here are more details about these procedures:
Know Your Customer
Just as the name implies, the KYC policies will help you get more information about your customers.
• Commercial Accounts: You are required to collect personal information about the owners of commercial accounts. In addition, you should protect information about businesses such as the Tax Identification Number (TIN) and the articles of incorporation.
• Consumer Accounts: Here, the KYC procedures and policies require you to collect the information of the customers such as the date of birth, social security numbers, and addresses. In the case of BSA and AML, you should document the data of customers to prove that you did the vetting on customers.
• Record Retention: The regulatory requirements require you to keep records for 5 to 7 years. In the case of digital records, they have to be scanned using some online account. The aim is that customer data stays in the networks and third-party vendors.
Bank Secrecy Act and Office of Foreign Assets Controls (OFAC)
These two regulations imply that you should continuously monitor the customer records to protect them from criminal threats. Particularly the BSA aims at regulating the Cash Transactions Reports (CTRs) and Suspicious Activity Reports (SARs).
The CTRs and the SARs entail the personal information of customers. The regulations also prohibit sharing of the SARs reports to the financial institution’s board of directors.
In the case of OFAC, you need to document the Blocked Person List (SDN List) and the Specially Designated Nationals List. Normally, these lists can include any identifying information.
Enterprise Risk Management and Financial Institution Compliance
Enterprise Risk Management (ERM) is a recent development in institutions whereby it aims at reducing fraud and risks that can greatly impact a company. Typically, ERM requires the NBFI and FI to conduct a very comprehensive analysis of credit risks.
The process of Financial Institution Compliance insists on endpoint encryption and security measures to protect consumers’ data on a continuous basis. This means that you have to perform ongoing carefulness even on third-party vendors to protect outsourced data.
How FIs Monitor Vendors
Vendor management has always been hectic for financial institutions. The compliance states that you have to ensure that third-party vendors are solvent and the information about these vendors is secure.
Many NBFIs and FIs include report reviews such as SOC 1 and SOC 2 which assist with vendor management practices. That is not all thou. You have to find a management solution to streamline the communications with the vendors.
Block Chain Technology in Financial Institutions
FIs have adopted machine and artificial intelligence (popularly known as the RegTech) in their operations. In fact, the FIs are continuing to embrace the blockchain technology where each party’s transactions are blocked by a cryptographic key.
The cryptographic key prevents data from being obtained. Therefore, the encryption protects and maintains the full history of the transactions. When you embrace blockchain technology, you will have the anonymity of the details and histories of transactions. This is absolute proof that you are protecting the information of customers.
Nonetheless, you will need third-party vendors to monitor the fintech blockchain networks. That means you will still need protection from third-party vendors. It is important that you store the reviews of third-party vendors in one place so as to be careful.
Also, you can seek companies that locate and track the responses of third-parties. All these practices will help you to protect yourselves and the customers against security risks. By doing so, you will also be complying with the government regulations.
Ken Lynch is an enterprise software startup veteran, who has always been fascinated about what drives workers to work and how to make work more engaging. Ken founded Reciprocityto pursue just that. He has propelled Reciprocity's success with this mission-based goal of engaging employees with the governance, risk, and compliance goals of their company in order to create more socially minded corporate citizens. Ken earned his BS in Computer Science and Electrical Engineering from MIT.