2023 marked a continued surge in compliance enforcement, with banks facing approximately $482 million in regulatory fines in the United States alone for breaches in AML, KYC, and related regulations . Globally, the trend remained upward, with over $263.3 million in fines issued in the first half of 2024, representing a 31% increase compared to the same period in 2023 .

Navigating these risks is not merely a matter of regulatory conformity but a strategic imperative for banks. To safeguard their financial well-being and reputational standing, banks are compelled to adeptly identify, assess, and mitigate these threats. 

In this high-stakes landscape, the role of advanced solutions, particularly automation technology, becomes increasingly pivotal. These solutions are not just tools but strategic assets in streamlining compliance processes and reshaping the way banks adhere to ever-evolving regulatory frameworks.

What is Risk and Compliance in Banking?

Compliance risk management in banks, especially in KYC and AML, involves policies and practices to minimize money laundering, and terrorist financing risks, ensuring regulatory compliance. KYC compliance for banks focuses on verifying client identities and assessing their financial behavior and risks. This includes collecting client information like personal identification, financial history, and beneficial ownership details to understand customers and prevent the misuse of financial services. AML aims to prevent money laundering and terrorist financing by monitoring and analyzing transactions for suspicious activities, with banks required to report such findings.

Key Components of Banking Compliance

1. Reducing operational risk: Effective KYC and AML measures help banks avoid involvement in illegal activities, preventing operational disruptions or legal issues.
2. Mitigating legal/regulatory risk: Banks must comply with KYC and AML regulations to avoid legal penalties and reputational damage.
3. Preventing financial crimes: KYC and AML serve as defenses against money laundering, and terrorist financing, protecting the financial system and society.

Common Compliance Risks for Banks

In the contemporary banking sector, six primary compliance risks demand urgent attention:

1.    AML compliance

Banks must rigorously adhere to AML risk management to prevent the influx of illegitimate funds into the legitimate financial system. Failure to comply can lead to severe legal repercussions, including hefty fines and reputational damage. In the first half of 2023, global financial regulators issued 97 fines, amounting to approximately $189 million, specifically for non-compliance with AML regulations, highlighting the severity of this issue.

2.    Customer Due Diligence (CDD)

It is critical to identify and authenticate customers and understand their organization activities and risk profiles. CDD and KYC enforcement actions reached a staggering $219 million in 2023.

3.    Data privacy and cybersecurity

Protecting personally identifiable information (PII) is crucial for banks, given their duty to maintain public trust. A lack of effective cybersecurity measures and internal business controls can lead to data breaches, and the compromise of sensitive client information. Ensuring robust data privacy and cybersecurity protocols is essential to prevent these risks.

4.    Consumer protection compliance

Banks must conduct fair and transparent dealings with consumers. Violations in consumer protection, including deceptive practices or unfair fees, can lead to reputational harm and loss of clients. 

5. Sanctions compliance

Banks must adhere to international and national sanctions, avoiding transactions with sanctioned entities and countries to prevent legal issues and fines.

6. Regulatory reporting compliance

Accurate and timely submission of required regulatory reports is crucial. Non-compliance can lead to penalties and reputational damage.

For banks, navigating these risks is not just about legal compliance; it's about building trust and maintaining integrity in their operations. 

How Banks Perform Risk Assessments to Ensure Compliance 

A banking risk assessment involves examining various hazards that could impact its operations. This evaluation typically includes:

• Identifying and examining areas of significant risk.
• Estimating the likelihood and potential impact of these risks.
• Aligning identified risks with the bank's overall risk tolerance.
• Developing strategies to mitigate these risks.
• Learning how to verify a business as part of the risk assessment process, especially in the context of KYC requirements.

 4 Types of Bank Risks

The main objective of this process is to ensure the bank's secure functioning while safeguarding stakeholder interests. Banks commonly assess the following types of risks:

1. Compliance risk, arising from potential legal violations, banks monitor regulatory changes and maintain compliance programs to adhere to laws and industry standards.
2. Credit risk, banks assess this by analyzing borrowers' creditworthiness, collateral quality, and broader economic factors influencing loan repayment.
3. Market risk, this involves potential losses from fluctuations in interest rates, exchange rates, and other financial variables. Banks mitigate this through strategies like hedging and diversification.
4. Operational risk, this covers losses from internal or external factors such as human error, or system failure. Banks conduct thorough process assessments and implement controls to minimize these risks.

Banks must also evaluate broader macroeconomic and geopolitical factors impacting their business.

How Banks Manage Risk and Compliance Through Automation

To prevent financial crimes and maintain regulatory compliance, understanding and complying with AML and KYC requirements for banks is essential. Digital compliance management becomes necessary to future-proof critical processes. As the sector grapples with an increasingly complex regulatory environment marked by stricter rules and more rigorous enforcement, this technology is a source of innovation and efficiency.

The software is designed to address the multifaceted challenges banks face in risk and compliance management. By leveraging cutting-edge automation solutions, banks are not only able to comply with current AML and KYC regulatory standards but are also equipped to anticipate and adapt to future changes in the regulatory landscape. This investment in technology is crucial for banks to secure their operations, protect their reputation, and maintain the overall integrity of the financial system.

How Continuous Monitoring Enhances Regulatory Compliance for Banks

Banks are required to actively comply with evolving laws and regulations for product safety and consumer protection. This necessitates regular reviews of operational processes and systems to align with current standards, including strong internal controls, data security, and financial reporting. Incorporating digital solutions, such as advanced software for managing compliance with KYC, AML, and other regulatory obligations, is crucial in this context. These digital tools streamline the compliance process, making it more efficient and accurate.

Continuous transaction monitoring, facilitated by these digital solutions, allows for the prompt detection and rectification of compliance issues, averting larger problems and conserving resources. The agility provided by digital compliance tools enables banks to adapt to regulatory changes in 2024 swiftly, enhancing compliance strategies. 

This proactive approach ensures ongoing compliance and strengthens a bank's reputation for regulatory adherence, positively impacting perceptions among regulators, stakeholders, and potential consumers. 

Automating Compliance Risk Management in Banking

Compliance risk assessment is crucial in risk management, and Client Lifecycle Management software from Fenergo significantly improves this process for banks. Our KYC Solution offers in-depth insights into the impact of compliance activities on residual risk. It automates customer due diligence, KYC processes, and ongoing compliance monitoring, giving a complete view of customer risk and compliance. With its adaptable, rules-driven approach, Fenergo quickly adjusts to regulatory changes, keeping banks updated on compliance procedures.

Fenergo's automation capabilities provide banks with an efficient, accurate, and reliable tool for maintaining compliance amidst constantly evolving regulations.

To get on the road to compliance, request a demo, or for more information check out our guide to digitalizing compliance. 

 Bank Compliance FAQs 

What is compliance in finance?

Compliance in finance refers to the adherence of financial institutions to laws, regulations, and internal policies that govern financial activities. It ensures institutions operate ethically, avoid legal penalties, and maintain trust with regulators and clients by preventing money laundering, and other financial crimes.

What is risk management in banking? 

Risk management in banking involves identifying, assessing, and mitigating potential threats that could impact a bank’s operations, assets, or reputation. These risks include credit, market, operational, and compliance risks. Effective banking risk management protects financial stability and ensures regulatory compliance.

Governance risk and compliance in banking

Governance, Risk, and Compliance (GRC) in banking is a strategic framework that integrates corporate governance, risk management, and regulatory compliance. It enables banks to manage risk proactively, ensure accountability, and meet legal obligations, while aligning operations with organizational goals.

What does compliance mean for a bank?

Compliance for a bank refers to the institution’s obligation to follow financial laws, regulations, and internal policies designed to prevent misconduct such as money laundering, fraud, and data breaches. A compliance bank ensures that all operations, from client onboarding to transaction monitoring, align with local and international regulatory standards to avoid penalties and safeguard reputation.

What is investment bank compliance?

In the United States, investment bank compliance refers to the systems and controls investment banks use to ensure adherence to federal regulations and industry standards. This includes complying with laws enforced by the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), and the Federal Reserve. 

TL;DR: Risk and Compliance in Banking 

Risk and compliance in banking involve managing regulatory, financial, and operational risks to ensure institutions adhere to evolving laws like AML and KYC. In 2023, U.S. banks faced $482 million in fines, with global enforcement up 31% in 2024. As compliance grows more complex, banks are leveraging automation and continuous monitoring to meet regulatory demands, prevent financial crimes, and protect their reputations. Modern compliance strategies include risk assessments, digital solutions, and governance frameworks that support proactive, efficient operations.