33 banks lost to create 4

from Exposing Truth
from Exposing Truth

Risk is always two sides. Get rid of one risk and it comes with another. Insurance plans, for example, supposedly reduce risk, but if you pay the insurance premium, you are essentially getting rid of the substantive risk for a financial one. One of the ways we have thought about reducing risk is by making each financial institution insure itself through sheer size. The local pizzeria simple isn’t much of a loan risk to a bank with trillions of dollars. We have offset that risk with the risk of less personal interaction. We have made banking more and more transactional and less and less transformational.

The day-to-day business of a bank is really transactional. But the purpose of all of those transactions are supposed to be both transactional and transformational. Transactional in that the money gets wired, or deposit is recorded, or loan is approved. Transformational in that the money wired could provide someone the funds to get to work that day, or the deposit recorded provides the documentation for a mortgage loan, or loan approved so that the borrower can start a new business.

The question for Americans in regards to the size of financial institutions is whether the transactional efficiency now hinders the economic transformation that it is supposed to foster. More efficient transactions free up funds for other economic activity. But have we gotten to a point where the freed up capital is primarily helping wealthier people who then are equipped to more resources to make them wealthier while leaving the less-wealthy behind?

This is not a new question, of course. And I certainly don’t have the solution for what is the right amount of competition in banking that will foster more economic transformation while keeping risk relatively low. One test that I place to begin my inquiry is this: What percentage of transformational projects have been funded by bank loans versus investment from wealthy people? As a follow up, I would ask, When did these transformational projects get funded? I don’t know the answers to these questions but my feeling is that greater transformational projects have been funded by wealthy people over time. While I don’t know what proportion is the right proportion for the American economy, we are probably in a period where bank loans do not transform much of the economy anymore. If my feelings were on the mark, it would probably also mean that banks play a less important role in transforming the economy than before, and, therefore, might need a shake up of some sort. That shake up could come in the form of bank breakups, which increases the number of leaders in the industry with smaller pockets, forcing them to rely on ideas to have bank loans compete better with equity investments. But then again we are not in the mood to taken on more risk these days, and competing with equity investors to fund projects is a riskier activity.

So, I guess what I’m saying is: We are thinking about risk to the financial system all wrong. Size itself is just one variable but it isn’t big enough of a variable to change the economy in any meaningful way. Our mentality now is that banks simply move money around and store it and lend it to known risks. People used to start business with loans. Now, less people start businesses with loans. We have given debt a bad name. And that won’t change with having smaller banks… after all, banks, regardless of size, are enablers of debt.


Marcus Maltempo is a Certified Anti-Money Laundering Specialist and a Certified Fraud Examiner with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. 

Bear Market Compliance

Jules, the bulldog, chase away the bears
Jules, the bulldog, chase away the bears

It’s easy to want to reduce compliance spending as the bank enters a bear market, but this is a bad idea for a whole host of reasons. The single primary reason is that revenue centers employees may take on non-compliant and high risk activities to reduce that decline in revenue to keep save their jobs. The incentive structure of your revenue center employees and the compliance culture will be tested.

Ideally, compliance spending should be relatively stable regardless of any short term market trends. In this case, short term means 18 months, because it is strategic. If your compliance department is organized to simply tackle tactical issues, you will need more compliance activity to address the possible rise of noncompliant activities.

In this sense, compliance is a lot like branding. Culture is one of the most important ingredients to Compliance Management. I know there are a lot of supposed Compliance Experts who talk about culture. If you haven’t noticed, my reader, I rarely talk about culture. It’s not that I don’t think it isn’t important, but because culture seems to be the only thing most Compliance Experts talk about; culture and tone from the top. But anyone who is actually a Compliance Expert would agree with me, culture is the one thing that doesn’t require compliance expertise.

In this entry, though, I will address culture from the perspective of a leader, not a manager. A leader who is promoting a Culture of Compliance will be cognizant of the fact that the Compliance Department’s culture and the Line of Business’s culture are often different. And the ways they are different depend on the mix of people in the Compliance Department more than the people in the Line of Business.

Compliance, by nature, requires being pedantic. Possibilities are dealt with, rather than thrown aside in favor of priorities. The few rogue employees are always looking out for possibilities, not necessarily what is right. The current bank structures are organized to reward those who bring in the most money, making the activity that brought in the money the de facto “right thing.”

We live in a society that rewards based on money, not productivity. Luckily, most of the time, productivity is the right thing. We don’t live in a society, however, that rewards those who are more productive; we live in one that rewards those who own the productivity. This means that a few superstar employees who know how to vastly upend the current level of productivity often are rewarded when the great many who help those superstars are not. (I know, I know, I’m starting to sound like a bleeding liberal; just hang in with me.) These superstars do not want to share their productivity gains with others who have helped them on their way. This last bit of change is what describes a transactional society, not a transformational one. Think about it. Transactions take just a minimum of two parties; one invariably makes a better decision than the other. Transactional society creates losers. A transformational one requires assessing one’s actual contributions and rewarding proportionally. A transformational society creates winners of varying degrees. When done right, much of the fear of getting laid off during a downturn will lessen because the issue isn’t due to proving one’s productive value but due to an issue of demand and the comparative productive value against other colleagues.

This doesn’t mean a transformational society is Utopia. But it means that people will understand the true competitive nature of the workplace: the larger competition between firms that an employee contributes to and the smaller competition between employees to be the most valuable on the team – again, the intrafirm competition doesn’t create losers but degrees of winning. But, as I said, we don’t have such a society.

That’s where managing the Culture of Compliance becomes important. Everyone should always feel like they are contributing to the welfare of the firm and compliance to policies and procedures should feel like a contribution to that firm welfare. And work should have a causality to it, meaning, one’s work causes something else to happen. If it merely has a correlation to it, as many corporate employees feel as they do, work feels bureaucratic. And it probably is. Then, of course, each employee’s duty to themselves comes down to the impression of productivity or cheating to be more productive. While only the latter is a compliance issue, they are two sides of the same coin.

So, to sum up the issue of tackling the Culture of Compliance as we head into a bear market, the Culture of Compliance starts from the duties of an employee having causal relationship to the firm’s well-being and understanding that noncompliance and brown-nosing are both results of caring more about results from a short period of time, not a long full history.

I know people might say that I am being idealistic with this, but if you are a compliance professional who doesn’t know how to lead your bank, you are ready to lead your compliance department. Compliance is a responsibility of every member of the firm and the Compliance department exists to take some of the responsibility away from other members of the firm so that they can focus on other activities. So, of course, I believe that leadership and Culture of Compliance as transformational issues, not a transactional one.

If you don’t believe me, then you are probably not a Compliance Expert. If you are a Compliance Expert, you would already know that regulators also agree with me on this point and often Delayed Prosecution Agreements are rewarded based on dealing with issues like I have mentioned.


Marcus Maltempo is a Certified Anti-Money Laundering Specialist and a Certified Fraud Examiner with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. 

If the French strip citizenship…

http://www.liberation.fr/france/2016/01/27/christiane-taubira-ecarte-l-idee-de-participer-a-une-primaire_1429318
Christiane Taubira, Minister of Justice via Liberation.fr

France is considering an amendment to their constitution that would strip French citizenship to those who are accused of terrorism and possess duo-citizenship. There is a problem with this, of course, because anyone can be accused of terrorism. What happens if that person is not guilty?

And then there is the racism that is neatly disguised as  counter-terrorism. Citizens of the European Union generally do not hold duo-citizenship because they have the economic freedom to do as their like across borders within the Union. That means, this law primarily targets non-Europeans in France. For this reason, Christiane Taubira, the French Minister of Justice (closest equivalent would be the American Attorney General of the Department of Justice), is stepping down. She is Afro-Latin born in French Guiana. She is at no risk of being accused of terrorism, of course, but it isn’t as though she can’t see right through this proposal.

As a financial compliance issue, this adds the terrible problem of figuring out how to treat such a person. Should this person hold a French bank account but is no longer a French subject, this person should be treated as a foreigner. Sounds simple but foreigners have limitations and other criteria attached to their French domestic accounts. Banks will have to scramble to recharacterize bank accounts. Operationally, the best way to do this would be to simply give the interested person a new account, but that puts the bank in jeopardy of losing the account altogether. This is an obvious cost to business that doesn’t seem necessary for a bank because… well, because the person isn’t a terrorist, or at least has not been found guilty of terrorism. Losing money that does not make the financial system and the nation any safer isn’t really a very good way to do business.

The only thing saving the French bank from losing that customer’s business would be that all banks in France would be subject to this. But because of the Union’s economic freedoms, the newly non-union citizen sill still be allowed to hold an account outside of France and even outside of the Union and still do normal daily business. The transition might be troublesome, of course, but that is no more troublesome than simply starting a new account. So, it isn’t much of a save for the French banking system.


Marcus Maltempo is a Certified Anti-Money Laundering Specialist and a Certified Fraud Examiner with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. 

 

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Growth Need In Anti-Financing of Human Trafficking

from Fair.org

Syrians are migrating en masse to Europe to flee their war-torn homeland. They would like to find a place where they have a chance at life and happiness. In their effort to get to Europe, many are selling everything they own to pay for a passage by water to Greece. Sometimes that ticket is for a boat to Greece, but not necessarily to get a chance at life and happiness.

One hears stories of rape and prostitution. People are enslaved forcefully. Others are coerced into a system that has them accruing debt with high interest rates, which they pay off through labor.

These stories have money behind it all. The transactions are, of course, illegal. The storage of money is also illegal. For banks of all sizes and locations, trying to track down funds originating from these criminal activities is difficult. And this problem isn’t going away. As a matter of fact, Freedom House, an NGO that studies human rights issues, recently released a report stating that a third of the human population lives at risk of war, violence, and terror on a daily basis. That is 2.43 Billion people. Banks and Money Service Businesses facilitate and secure the transactions that make human trafficking profitable.

Here’s where technology can be of great help. On a case-basis, data analysis tools play an important role in discovering players in such industries. On a systemic-basis, a central ledger might be a solution. This is most commonly called BlockChain. The idea is to have a single place where all accounts must balance and all transactions are verified by the community as a whole. Transactions can still be anonymous, but the facilitating financial institution has a place to check unique funds – unique because each unit of currency will have an identification code. You know those numbers and letters stamped on the US Dollar Bill? Yes, that kind of uniqueness. Currently, we treat a single dollar no different from any other dollar. But with a record of that unique identification available, we can start to root-out human trafficking networks.


Marcus Maltempo is a Certified Anti-Money Laundering Specialist and a Certified Fraud Examiner with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. 

Virtual Reality to bring compliance to life

from Risk Management Magazine
from Risk Management Magazine

One day this will happen. For now it is a headline that is pie in the sky. But there are situations that will come in handy even now.

I’m thinking of compliance training. The current state of compliance training is either classroom training or an online course where there are readings, maybe some audio and or video and then there is an exam.

Virtual Reality is very good for simulations. Here’s a chance to make every trainee go through simulated situations. I can imagine a simulation course with four or five scenarios. Each of them adding complications, making the experience more real. And unlike the current training schemes, the trainee can do anything that can be done at a firm. S/he could do things that are completely unrelated and waste time during the simulation, and then fail. The trainee could decide to investigate something when s/he should have simply reported it the appropriate person first. How about facing multiple scenarios at once. That’s very real. VR can address not only the compliance issues but how the trainee could deal with the emotions that come with trying to deal with these situations. Many compliance issues arise out of pressure and not out of malice. VR can be a very good tool to address this.

The technology already exists. The Department of Defense already have VR “games” to train soldiers for stressful and complex scenarios. Financial Regulatory Compliance simulations are simpler than combat.


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. 

Importance of formal training in Compliance

There are many jobs that one can learn from experience alone. Compliance Officer is not one of them.

ACFELOGOLike Law or Accounting, becoming an effective compliance officer requires three sets of knowledge: foundational knowledge gained in formal education, specialist knowledge gained in training, and management and leadership knowledge through experience. Foundational knowledge is important because that’s the common knowledge with which the world operates. And management and leadership knowledge can only be developed through real world experience, no amount of conceptual knowledge alone will make one a good manager or leader. The middle piece, the specialist knowledge, requires training because without it the Compliance Officer simply becomes a Compliance Manager or Analyst.

The reason Compliance is like Law or Accounting is that the logic with which Compliance works differs. The logic behind complying with Financial Regulation comes from understanding a business at the operational level as well as the contribution the firm makes to the financial markets overseen by the regulator. Understanding the operations of a business could be gained through training and experience within a business. Understanding the requirements and priorities of regulators require interfacing with the regulator. Many roles are title Compliance Officer, but the true CO roles are the ones that require both arenas.

CAMS LogoThere are several ways to gain the necessary training. Many large financial institutions have Compliance training. Usually, this is the bare minimum of Compliance training necessary. Some of them might not actually be Compliance training but simply a training about suspicious activities awareness. To be qualified as Compliance training, it should include information about regulatory functions and the responsibilities of various regulators and their interactions with Self Regulatory Organizations (SROs) and private firms. In the US, this means a need to cover some combination of the following entities:

And, at a minimum, there is a need to cover the following topics:

These are a lot of topics and no one can be an expert in all of them. But without exposure to this full spectrum of knowledge, a Compliance Officer is not equipped to dealing with the complex nature of the competing interests without an overview of these subjects. There are several ways to get formal training on these entities and matters.

The most common, direct, and practical way to get the formal training needed to be equipped to be a Compliance Officer are through associations that have developed the certifications.

There are programs at a few institutes of higher education that offer coursework specifically addressing these entities and topics:

  • University of South Florida has undergraduate, graduate and PhD programs in Criminology
  • Pace University has Certified Compliance and Regulatory Professional (CCRP)
  • Utica College has MS in Financial Crime and Compliance Management
  • Charles Sturt University has Diplomas, BA and MA degrees in Anti-Money Laundering and Counter Terrorist Financing, Intelligence Analysis, and Investigations

I have provided a concise, compelling reason why you should be staffing your firm with trained Compliance Officer or training the untrained employees who are moving into Compliance. Hopefully, this will be a good starting point for you to think about what kinds of issues your firm will have to face and the value a trained Compliance Officer will bring in handling them.


Marcus Maltempo is a Certified Anti-Money Laundering Specialist and a Certified Fraud Examiner with more than a decade of experience. 

Is it time to grow your compliance department?

US Beach Volley Team celebrate winning at Athens Olympics

No… or at least you hope.

For most financial services firms, it is a resounding “yes.” Why? Because your firm has not tested various measures set in place to comply with Dodd-Frank.

Unless you are one of the 40 largest banking institutions in the United States, compliance demands are much more than the compliance department can handle. A smallish bank with assets of about $15 Billion will have the full spectrum of depository financial products, a full spectrum of retail lending products, and some limited investment and financial advisory services for individuals, businesses and governments. Aside from a lack of active funds and securities trading floors, this pretty much covers Dodd-Frank. With about $700 Million in Revenue and about $100 Million in Net Income, the bank probably only has about $1 Billion in equity to play with. Reducing that Net Income means, reducing that equity cushion some more. So, then the bank takes on riskier loans for higher interest revenue, which will then require more compliance professionals, undoing the higher risk taken to offset the additional compliance cost to begin with.

Some of the solutions available to other industries is not available to your bank either. The bank cannot outsource compliance all together because… BSA compliance will not allow it. So, how can a smaller bank cope with the cost of complying with the regulation?

Merger is one method. Just become a larger bank, decreasing the marginal cost of management and overlapping markets, and simply have more resources available. This method defeats the purpose of the smaller bank because smaller bank has its own value proposition to the market, mainly, familiarity. You’re not supposed to be a nobody in a smaller bank.

Outsourcing whatever possible is another method. This is a tricky proposition. This might provide the bank with the leverage pressuring the vendor to reduce costs and, hopefully, the vendor can because it has other customers from which it has learned to be more efficient. On the other hand, this is at the cost of an internal culture that might have made the bank successful to begin with. Plus, the vendor actually has no incentive to pass on the productivity gains to the bank. And when the vendor screws up, the laws do not really have a recourse for vendors, which means the bank is taking on an operational risk as well.

This is what I propose for such banks: Hire senior level compliance officers as a service from vendors while hiring lower level compliance officers directly. Obviously, the chief compliance officer cannot be external, but all of the direct reports could be. The idea is that this regulatory change is being managed by people who have experience across the industry, and the bank can train lower level employees to take over over time. This hybrid method captures the most important part of hiring an external firm while obtaining the bulk of the manpower to maintain the business-as-usual processes and perpetuate the culture of success.


Marcus Maltempo is a Certified Anti-Money Laundering Specialist and a Certified Fraud Examiner with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.