Interest Rate’s Effect On Compliance

Miranda Kerr says "you're welcome"
Miranda Kerr says “you’re welcome”

I thought if Interest Rates won’t interest you then maybe Miranda Kerr would. Obviously, this only works for 2/3rds of you. (About a third of you aren’t into Miranda Kerr or any other woman.)

Interest rates have many economic effects, which I do not need to describe to my audience. The Federal Reserve decided to raise the interest rate (Fed Funds Rate), to show that the economy is doing well. There are plenty of signs that the Fed is doing this as a symbolic move but it is still under the belief that the economy is not doing well. I’m of the side that the economy isn’t doing well, but I will get into why some other day.

For certain types of compliance, problems will increase as a result of interest rate increases. Interest rates can be viewed as the cost of capital. A cost eats away at income. It puts pressure on those who are supposed to maintain costs and those who are supposed to bring  in revenue.

So, the OCC isn’t likely to see much difference in volume of issues arising from financial institutions or money service businesses. OFAC isn’t going to be affected either. But FINRA and the SEC will. FINRA moreso than SEC because they deal primarily with revenue centers. SEC doesn’t deal with operations as much as reporting issues. But, of course, when the pressure to perform increases, there might be some increases in financial statement reporting fraud cases.

FINRA will face the problem of brokers trying to replace lost revenue. No matter what the interest was, if there is an increase, the pressure increase forces some to take shortcuts. Financial statement reporting fraud is one. Others include, ghost sales, underreporting expenses, embezzling, or, in the case of brokers, churning (making additional transactions to create business).

Banking is affected as well. Mortgage bankers may provide loans to those who wouldn’t qualify with the new interest rates because the amount lent maybe be higher than the bank is willing to accept. Clients might adjust records to pass credit analysis with inflated projections or hiding liabilities, such as other loans.

All of these things can happen without interest rate increases but the increase puts more pressure on these functions.


Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is a member of ACAMS and ACFE. 

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