With the rapidly growing digital revolution, financial institutions have undergone a significant technological change to meet demands from increasingly sophisticated customers and global competition. Hence, it is crucial to know what should be your risk and compliance priorities and what compliance issues to avoid in 2023.
Let’s start here; what are compliance issues?
Compliance issues are activities that can lead to violations of established legislation or regulations. For example, financial institutions could face compliance issues when they fail to follow internal policies and procedures or evade tax policies. Compliance issues could sometimes result in fines or even jail time. In other cases, it could lead to a bad reputation. Either way, it’s important to take compliance seriously by staying ahead of regulatory trends and market demands.
In this article, we explore major risks and compliance trends in 2023.
1. Data privacy compliance
Data privacy compliance is critical for financial institutions and their customers. With the rise in cyber-attacks and breaches, organizations are finding more ways to protect their customers’ personal information. The General Data Protection Regulation (GDPR) is a case in point.
In the US, there could be more legislation like the California Privacy Rights Act (CPRA), which has become effective since January 1, 2023. The CPRA amends the California Consumer Privacy Act (CCPA), established in 2018.
Over 30 states in the US have considered data privacy regulations. Still, the CPRA happens to be one of the most prominent examples of privacy and security laws on a state level and is set to become more stringent in 2023. The new modifications to the data privacy law give more enforcement power to California through a separate state agency, California Privacy Protection Agency.
To ensure compliance with the CPRA, your financial institution may need to implement additional programs in 2023, as enforcement will start on July 1.
2. Third-Party risk compliance
Working with third parties poses risks for businesses in terms of keeping up with compliance standards. As a result, third-party risk management will continue to be a key compliance trend for organizations. This trend will continue as more financial institutions unavoidably rely on outsourcing their operations or engaging contractors for services that used to be performed internally.
The number of third parties involved in business transactions has increased dramatically in recent years. It’s not uncommon for a single transaction to include dozens of third parties. This makes it difficult for businesses to stay on top of their risk management responsibilities.
As we move forward in 2023, here are some critical third-party risk compliance considerations:
Risk Assessment: Financial institutions should increasingly look at their supply chain to identify potential risks that protect them from cyberattacks or adverse PR events.
Contractual Compliance: Contracts with third parties should be legally binding and compliant with regulations like GDPR. They should also contain clauses dealing with bribery, corruption, cybersecurity, and other essential compliance risks.
Third-Party Risk Management (TPRM) program: This includes monitoring suppliers’ performance and managing their access to sensitive data by ensuring adequate security measures are in place. Also, a TPRM program must integrate with existing business processes and technologies to succeed. Third-party risk management systems must be able to seamlessly integrate with existing enterprise technology, such as HR systems and data analytics tools, to ensure that the right controls are in place throughout an organization’s entire vendor ecosystem.
3. Data breach risks
Data breaches in the financial services industry have been growing at an alarming rate. A 2022 report from a cybersecurity firm, Flashpoint, reveals that the financial sector was second on the list of industries hit hardest by data breaches. Banks in the US were most impacted, according to the report. About 79 U.S. financial services companies reported breaches affecting 1,000 or more consumers.
Going forward, the best ways to curtail data breaches or mitigate their impact are:
Quick detection: IBM said in a recently released report that it took an average of 9 months to identify and contain a breach in 2022. Further analysis showed that risks could be avoided on a large scale if the detection timeframe is shortened. “Extended detection and response (XDR) technologies helped save an average of 29 days in breach response time”, the report read in part.
Dedicated team for tackling breach incidence: The IBM report also revealed that organizations with incident response teams that regularly test their IR plan can save millions in case of a breach. The IR team should include representatives from information security, legal, and privacy, as well as business development. The team’s work may include analyzing the breach, assessing its impact on customers and partners, communicating with regulators and law enforcement agencies, and assisting impacted individuals.
4. Money laundering & proliferation financing
The fight against money laundering and proliferation financing continues to be top-of-mind for governments and regulators globally. But, the effectiveness of anti-money laundering and combating the financing of terrorism (AML/CFT) measures across all countries continued to fall in 2022, according to the Basel AML Index.
Criminals have found various ways to launder their money. Cryptocurrencies and other digital currencies have been their sweet spot. A report from Chainalysis showed that crypto hackers stole $3 billion from victims in 2022.
By signing an executive order, President Biden has signaled the intention of the United States to develop a more robust regulatory framework for cryptocurrencies in the years ahead. The order calls on agencies to consider how they can use regulation to manage the risks associated with digital assets.
In addition, using AI to fight money laundering & proliferation financing will form a huge part of compliance strategies for financial institutions as it has proven to help mitigate the cost of data breaches. Using AI and automation tools, banks can improve measures to combat money laundering and terrorist financing in terms of their speed, quality, and efficiency. Although, AI cannot replace humans. However, it will be necessary to reduce the need for human input to accelerate AML investigations.
5. Sanctions Compliance
Sanction programs constantly evolve, and banks must stay current on all changes to ensure compliance. In particular, the Russian-Ukraine war and related events have sparked a new wave of sanctions.
In 2022, the US sanctions program was updated several times to accommodate new information on conducting business with certain individuals, organizations, and countries. It included an updated list of Specially Designated Nationals (SDNs), which mentions individuals and entities subject to economic sanctions. Following its dynamic mode of operations, the Office of Foreign Assets Control (OFAC) has taken new steps this year to address emerging issues regarding sanctions.
To prevent sanctions violations, financial institutions must have strong internal compliance programs with clearly defined roles and responsibilities at every level of the organization. This can help them react quickly if an incident occurs. In addition, OFAC has also identified five essential components of any compliance program that could be considered to comply with the sanctions program. They are management commitment, risk assessment, internal controls, testing and auditing, and training.
6. Greater focus on ESG
As ESG (environmental, social, and governance) issues become more prevalent, financial institutions will need to adapt their risk and compliance strategies accordingly. Eighty-one percent of institutional investors in the US said they plan to increase their allocations to ESG products over the next two years, according to a PwC report.
This trend is particularly relevant for financial institutions, as it can be a competitive advantage for those who embrace ESG practices. For example, banks that integrate environmental sustainability into their business operations could be rewarded with higher customer loyalty and better employee satisfaction. As such, financial institutions should increasingly incorporate ESG policies into their strategic planning processes to help them meet stakeholder expectations while staying abreast of regulatory requirements.
7. Cyber Risk
One trend that will continue to grow in importance over the next few years is cyber risk. In particular, the SEC is paying more attention to how financial services manage their technology risks and how they intersect with other business areas. Recently proposed changes to the cyber reporting signals that the SEC is taking additional steps to ensure customers’ interests are protected.
In 2023, we expect that regulators will focus on the following:
- The intersection between cyber risk management and technology risk management
- The need for organizations to manage both types of risks as part of a more extensive compliance program
- How third-party vendors impact organizations’ IT infrastructure
8. The rise of Regtech
In the wake of growing financial criminal activities, financial institutions have been forced to deal with many complex products and services. Regulatory tech or Regtech will gain dominance because financial services continue to battle digital threats and manage the growing volume and complexity of regulatory filings.
RegTech reduces compliance costs and provides efficient processes for managing risk and staying ahead of regulations. These benefits have led to increased demand for RegTech solutions across financial services, and there is no sign of slowing down in the coming years. This year, Regtech’s revenue is expected to reach $115 billion. But, again, the benefits are clear: Regtech provides access to data that can be used to automate compliance processes and make regulatory
reporting more efficiently.
9. Leveraging AI and automation tools
In response to increased digital transformation, many financial institutions are turning to artificial intelligence (AI) and automation tools. These technologies can help detect suspicious transactions and mitigate unauthorized access by analyzing past activity, user behavior patterns, network traffic patterns, and more. For example, a report from IBM revealed that “breaches at organizations leveraging AI and automation tools cost USD 3.05 million less than at organizations without those tools.”
10. Executive leadership’s role in managing compliance risks
The risk and compliance function is no longer a reactive, control-based function. Instead, it is now an integrated part of the enterprise, where executives at all levels are expected to actively build a culture of compliance that permeates the entire organization.
The days when a compliance officer did all the work of identifying risks and reporting them up the chain are long gone. Today’s executives need to understand how their organization’s compliance efforts fit into a larger strategy and how they can support other business functions like HR and IT in managing risk across the enterprise.
The challenge for senior executives is that they do not have the time or expertise to deal with all areas of risk management. This has led businesses to outsource their risk functions – including compliance – to third parties.
Compliance issues can be the result of intentional or inadvertent actions. To prevent these issues, authorities must use a comprehensive approach to identify, manage, and monitor bank compliance risks. They must also have a response team in place to address compliance issues if they occur.
At RADD LLC, we offer strategic planning and execution along with regulatory analysis to help with all aspects of regulatory compliance. From risk management to BSA/AML and IT compliance, we have a team of professionals with decades of experience to strengthen your regulatory compliance programs and activities. Contact us today to get started.