OCC Spring Risk Perspective: 5 Takeaways on Compliance Risk

4 mins

Despite its general strength, the US federal banking system is apparently susceptible to the ongoing economic weakness caused by the rampant spread of coronavirus. Earlier this month, The US Office of the Comptroller of the Currency (OCC) published its latest Semi-annual Risk Perspective explaining the key issues of the country’s banking system and the impact of the COVID-19 pandemic on the industry. The Spring report says banks “face weak economic conditions resulting from the economic shutdown”, leading to negative impacts on earnings, credit quality, operations, and capital. It added that record-high unemployment levels and business closings will adversely impact credit risk, while operational risk will be elevated as banks implement new processes and procedures, adapt business continuity plans and respond to pandemic-related fraud and cyber risk.

The OCC also opined that compliance risk is increasing due to a number of reasons including changed operations, remote working, rapidly changing customer service environment, and new assistance programs for consumers and small businesses – such as the CARES Act and the Paycheck Protection Program (PPP). Here we are trying to present certain highlights related to compliance risk in the OCC report and suggest ways to overcome the challenges mentioned there.

1. New Government Relief Programs Adding to Existing Stress

Stimulus measures such as the CARES Act and PPP have increased credit, operational, and compliance risks as banks are required to “act quickly to modify operational processes while also functioning with high levels of employees working at home and absenteeism,” according to the OCC. Banks need to process higher transaction volumes, and at the same time, they need to manage heightened cybersecurity risks, and potential fraud related to stimulus programs. The high volume of PPP applications and the short processing time frames may complicate Banking Secrecy Act (BSA) and fair lending compliance responsibilities associated with underwriting and opening new accounts, monitoring customer activity, communicating with customers, and timely meeting BSA and Office of Foreign Assets Control (OFAC) reporting requirements, the regulator noted.

2. Reasonable Delays in Meeting BSA Requirements

The OCC reiterated its earlier statement recognizing that there “may be reasonable delays in meeting BSA compliance obligations during the COVID-19 pandemic.” Among other US regulators, the Financial Crimes Enforcement Network (FinCEN) earlier provided regulatory relief under the risk-based approach to BSA compliance, while the OFAC issued a statement recognizing that the pandemic may cause delays in compliance. The OCC noted that pandemic response measures and programs may affect timely compliance with bank obligations implementing BSA programs and OFAC-administered sanctions such as onboarding processes, customer due diligence updates, suspicious activity alert investigations, and blocking reports.

3. Being Aware of Evolving Typologies

The OCC also encouraged banks to monitor information provided by law enforcement agencies and international anti-money laundering standard-setting organizations regarding the ways that criminals are adapting scams and money laundering techniques to exploit COVID-19-related vulnerabilities. It suggested that the Federal Bureau of Investigation website provides common red flags for identifying COVID-19-related schemes. “Banks should be aware of evolving typologies and ensure their anti-money laundering programs are commensurate with their risk profile,” it said.

4. Implementing Risk-based Adjustments in BSA Systems

The OCC said banks should implement “appropriate risk-based adjustments in their BSA systems to address pandemic-related circumstances and “keep their examiners updated on potential BSA and sanctions compliance issues”, including potential delays in meeting reporting requirements. The watchdog cautioned that any deferred actions and temporary waivers should be tracked so that banks can promptly readjust systems after the operating environment has returned to normal. The OCC is also adjusting its risk-based approach for BSA compliance examinations and assured that it will consider the impact of COVID-19-related measures on BSA compliance in determining any new supervisory response.

5. Remaining Diligent to Ensure Compliance with Consumer Protection & Fair Lending

The OCC noted that banks should establish change management and compliance risk management processes to identify, measure, monitor, and control the emerging risks associated with COVID-19. As the pandemic may lead to increased customer complaints related to branch closures, reduced operations and communication issues, banks “must remain diligent to ensure compliance with consumer protection, fair lending, and other laws and regulations when dealing with applicants for new or modified loans.” The regulator added that the increased reliance on remote work may create challenges in maintaining safeguards for protecting consumers’ personal financial information and for monitoring customer interactions for consistency with bank policies and procedures.

Mitigating Compliance Risk with Modern Technology

 The COVID-19 pandemic has significantly altered the compliance scene within banks. There are challenges of maintaining process efficiency amid increased workloads and addressing emerging financial crimes that are well-adapted to the current situation. To remain compliant with regulations, banks need to build futuristic compliance programs which are resilient to internal and external shocks. Modern technologies like artificial intelligence and machine learning can help banks significantly in making their compliance programs resilient and sustainable. We, at Tookitaki, provide machine learning-powered enterprise solutions to address regulatory compliance problems in the financial services sector. We move beyond static rule-based systems and adopt a new approach to prevent financial and reputation loss.

To address existing challenges in anti-money laundering (AML) compliance, we have developed a robust and innovative platform – the Anti-Money Laundering Suite (AMLS) – which features money laundering pattern sharing mechanisms and automated model learning and evolution.  The next-generation platform combines the efficiency gains and effectiveness of AI in key compliance processes such as transaction monitoring, screening and customer risk assessment while providing complete transparency into our machine learning models and the ability to explain model predictions in a hassle-free manner. AMLS has the ability to handle complex and ever-changing customer behavior and is adaptable to frequent updates in regulations. The platform has already proven its capability to detect anomalous transaction behavior and to improve process efficiency related to alert triaging, investigation and reporting in banking environments.

Our end-to-end, machine learning-powered reconciliation software — Tookitaki Reconciliation Suite (RS) – maximizes efficiency and effectiveness in the reconciliation processes within financial institutions. Built on proprietary machine learning algorithms, RS has specific modules to support automated matching and automated exception handling. Our matching module handles complex match cases and overcomes matching inefficiencies, while, the exceptions handling engine successfully resolve the exceptions by improving break classification according to a client’s business requirements. It has the ability to reduce operational costs and associated risks, ensuring enhanced compliance and scalability.

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