Legal High Jinx With Compliance

Roll Call is reporting that the US Congress should review the “common bond” standard for Credit Union status. This comes on the heel of the National Football Association, the sports league, that has been operating under a tax-exempt status for trade and professional associations.

http://reggiestake.com/nfl-2012-league-schedule/
NFL (credit Regie’s Take)

The NFL was considering itself an association of professional football players and that the league managers were hired by the professionals to manage the league. Well, this is really rather far from the truth. The league is run by people who mostly represent the team owners, who are not the professionals. In order for the league to truly meet the standard, the team owners would also have to be hired by the players to manage them. What astonishes me is that Congress is not pursuing back-taxes from the NFL. I hope the IRS does. The US government could be looking at getting back close to $200 Million from back taxes over the past three or four decades. (I don’t know when the league organized as a professional association, so I don’t know if I can take this claim back to its origins.)

That was an aside to the main issue. CU’s were designed to be tax-exempt so that banking services can be provided to low- and moderate-income households while reducing risk by requiring a “common bond.” The common bonds used to be applied rather strictly. CU members had to be all employees of a sponsoring employer or all members of the same trade association. But the common bond definition has expanded. Expanded by how much? Well, New York City has one for anyone living within the city boundaries. That’s more than 8 Million people who qualify. The largest CU’s are much larger than community banks.

Not only is there an issue of tax revenue, but compliance issues. CU’s do not have to meet many of the banking compliance standards and rules. This is so because, supposedly, they are like community banks, small, local and limited in products and services. Some of this is true. CU’s take deposits and have loan products like credit cards, home and auto loans and student loans. But many have insurance and retirement plans. They are just one step away from providing brokerage services. Some provide near-brokerage service by providing financial advisors. Plus, less than a third of CU customers meet the definition of low- and moderate-income earners.

I don’t have a solution for any of this. I certainly have my opinions. But economically, this is a much more complex issue than the way it has been laid out by all sides. From a compliance perspective, I am generally of the opinion that standards should really be set by activity, not by size of an institution. But politics often makes it difficult to apply rules in this clear cut manner and often set arbitrary standards, like size of institutions.

Tech-up Compliance Now with CompliTech!

ABA Center For Regulatory Compliance
ABA Compliance Central

Compliance has a much bigger role in the business of banking than responding to regulators. Compliance must prevent mishaps.

Banks are continually investing in technology to defend themselves against cyber crime. But because Compliance as a function of its own only has come into prominence in the last few years, there aren’t any status quo compliance technologies. Plus, Compliance is an area that covers a lot of ground. There are the core Compliance functions like AML, Compliance Training, Compliance Audit and Compliance Advisory. And then there are both support functions and regulatory groups. The knowledge required to have a fully functional Compliance department is as large as the number of products and services the financial institution has. The major investment in technology right now support monitoring, reporting and analysis. And these tools are fairly rudimentary.

The solution is to have startups who partner with law firms and compliance professionals to develop Compliance products and services using a SaaS model. SaaS is Software as a Service. If you’ve never heard of it, you have definitely been involved with it. Cloud computing is generally SaaS-model business. Dropbox is a SaaS-modeled business. It provides the customer with storage space on a need-basis. Amazon has a cloud system for web businesses. Tumblr uses Amazon’s cloud.

The SaaS model is perfect for most banks. Most banks do not have profits in the billions. Investment in tailored technology is just not feasible. Community banks sometimes eek out a profit in the hundreds of thousands. Credit Unions are theoretically profit neutral, but if there is a surplus that can be set aside for technology investment, they are just trying to keep up with all of the various online and mobile banking products and services that are available for customers.

So, someone needs to marry Compliance with Technology for these smaller financial institutions that simply cannot afford the develop their own technology and yet they face all of the same AML risks and most of the same Compliance requirements.

I would be willing to to join someone who is interested in doing this. I am not a Luddite but I am not a query master. My area of expertise is in managing Compliance departments, relationships with regulators and operations. A truly well rounded CompliTech firm should have the following people as founders or early on: lawyer, AML specialist, statistician, UI/UX developer, database developer and Compliance specialist. I fulfill two of those areas. If you think this is a viable business, let me know.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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