The Changing Nature of Compliance Risk; Passing a Compliance Exam Is the Easy Part

Barefoot, Jo Ann S., ABA Banking Journal

Science-fiction writer Ray Bradbury said, "Living at risk is stepping off the cliff and building your wings on the way down."

In-flight wing-building is a good analogy for banks' efforts to transform their compliance programs into useful risk-management systems.

Bank compliance systems largely developed in response to risks that arose 20 years ago. They have been revised and extended onto over the intervening years, but in most banks they have not been fundamentally re-engineered.

The risk these old systems were created to meet was the compliance examination. When regulators began conducting these specialized exams in the 1970s, virtually all banks appointed compliance officers and set up basic compliance programs. Since then, the programs have been driven, and evaluated, by the goal of getting a good examination.

A "clean exam" has been equated with low compliance risk.

Well, no more. The six scariest words in the compliance world today are:, "But we got a clean exam!"

Banks that continue to view the examination as the only risk arena for compliance are in danger of missing problems that could do them much more harm than any but the harshest examination-based enforcement action.

Consider the fair-lending enforcement cases that have been pursued by the Department of Justice. Most of the practices involved in these cases had previously been looked at by bank examiners and not cited as illegal.

Examiners knew for years, for example, that Chevy Chase Savings did not have branches in African-American neighborhoods. They had undoubtedly done Regulation B reviews of every depository institution sued by Justice. Some of these banks may have adopted the practices that triggered their Justice investigations only recently, but there is no question that many had been engaged in them for some time--through several or even many examinations.

Indeed, these institutions probably had "clean exams." But they ended up facing the apex of compliance risks--formal enforcement by Justice.

Traditional efforts are inadequate

Today, two things are happening that make traditional compliance programs inadequate:

First, sources of risk are proliferating beyond the primary regulator and its …

Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: The Changing Nature of Compliance Risk; Passing a Compliance Exam Is the Easy Part. Contributors: Barefoot, Jo Ann S. - Author. Journal title: ABA Banking Journal. Volume: 89. Issue: 6 Publication date: June 1997. Page number: 28+. © 2009 Simmons-Boardman Publishing Corporation. COPYRIGHT 1997 Gale Group.

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