Avoiding the pitfalls of non-compliance

by  — 2 October 2013

Over the last four years, since the Obama administration took office, the United States (US) government has added over 11,000 pages of regulations, most recently, the Foreign Account Tax Compliance Act (FATCA). Umair Hameed and Robin Butteriss from Deloitte, give their opinion on how to keep abreast of regulations in a climate where the operating mantra for most corporates is to try and cut costs while maintaining profitability and market competitiveness.

Keeping abreast of new regulations is certainly not easy, let alone being able to successfully implement them. As economies emerge from the global recession, financial institutions continue to be under ever increasing management and shareholder pressure to curtail costs, whilst endeavouring to maintain profitability and market competitiveness.

Reputational and financial risks of non-compliance have become increasingly evident, with recent fines of several hundred million dollars being levied on financial institutions, for failing to instil adequate anti-money laundering frameworks. A prominent bank within the region had its assets sold in a rush, as it essentially became defunct within a few days of an announcement by the US State Department that the bank had dealings with prohibited organisations.

So how can financial institutions come to terms with the ever-growing complex myriad of regulations? Avoid the pitfalls of non-compliance whilst seeking ways to benefit at the same time?

Compliance officers should be your first point of contact, as they play an important role in understanding the risks associated with non-compliance and keeping senior management well informed of these risks. However, far too often, organisations cut corners when it comes to hiring and recruiting well-trained compliance resources.

Two categories of companies

Based on Deloitte’s experience with anti-money laundering and FATCA compliance, every organisation has shown to have a certain appetite for regulatory compliance. Organisations which strive to build a strong culture geared towards regulatory compliance are often the ones that believe in preparing now, for the future. However, some organisations especially international ones with offices set-up in the Middle East tend to fall into a natural trap of becoming complacent and relying extensively on their global (head-office) practices, without necessarily taking into account the local regulations. For example, in the case of a global financial intermediary based in one of the financial free-zones in the Middle East, was penalised by the local free-zone regulator for failing to comply with the free-zones regulations, when in hindsight senior management at this organisation felt they were indeed complying with more stringent regulations set by their home regulator.

In uncertain times when financial institutions are faced with new regulations, as has been the case with FATCA, they tend to look at each other for direction. A vast majority of them are concerned that if they are the first ones to implement, then they will potentially lose business to competitors. However, with regulations such as FATCA, there is limited competitive advantage to be gained, as all financial institutions are ultimately impacted in one way or the other.

Lastly, employees often do not fully appreciate the benefits of certain compliance procedures let alone wanting to comply with them, resulting in a natural tendency to resist. How many of us are guilty of perceiving compliance as being a cumbersome hindrance? In addition to mitigating the risks of non-compliance, certain anti-money laundering  and knowing your Customer measures can often be leveraged as a means of growing the business.

Written By: Robin Butteriss, head of Financial Advisory Services for Deloitte Corporate Finance Limited in Qatar. Umair Hameed, director in the Financial Services Regulatory Advisory practice and co-leader of the Deloitte Middle East FATCA proposition. 

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