According to a 2013 Financial Crime survey, 2014 is expected to be an expensive one for regulatory compliance , with more than 20% more being spent for each of anti-money laundering compliance and compliance with the U.S. Foreign Account Tax Compliance Act (“FATCA“), for a total of a 40% increase.
The financial crime risk that senior officers perceive as being at the forefront is cybercrime (such as online fraud and account fund theft). The weak point in protection against cyber-security was seen as the use of mobile devices externally by employees and remote log-ins that expose and may compromise security systems at financial services firms.
The biggest change in regulatory compliance in respect of financial crime is the increased focus on insider trading and FATCA. Until recently, financial services firms appear to have believed that FATCA would apply just to private banking and now realize the breath of its applicability. The emergence of tax sharing agreements is also seen as a matter of increased compliance scrutiny for firms.
FATCA comes into force July 1, 2014. Its intent is to stop tax evasion by U.S. persons and entities. It is a reporting regime that requires all foreign financial institutions (“FFI“) and foreign non-financial entities (“NFFE“) to identify and report to the IRS in respect of accounts held by U.S. persons or U.S. foreign entity worth US$50,000 or more. A 30% withholding tax is imposed on the U.S. source income of any FFI or NFFE that fails to comply with FATCA.
Looking further afield, respondents to the survey noted that Basel III will be a regulatory compliance concern over the next three years. Basel III regulations include a number of requirements for banks and financial institutions, such as:
- Capital – quality & level of capital with a minimum of 4.5% of risk-weighted assets; capital loss absorption at point of non-viability; capital conservation buffer of 2.5%; and countercyclical buffer of up to 2.5%.
- Risk Coverage – securitization improvements; higher capital for trading and derivatives activities; counterparty credit risk strengthening for measuring exposure.
- Containing Leverage – non-risk based leverage ratio that includes off-balance sheet exposure.
- Risk Management & Supervision – better management of risks with sound compliance practices.
- Market Discipline – Enhanced disclosure of components of regulatory capital and reconciliation to reported accounts.
- Liquidity – sufficient liquid assets; net stable funding ratio to address liquidity mismatches; improved liquidity management; and monitoring of liquidity.
The projected compliance costs for regulatory matters in respect of financial crime means that financial institutions and service firms will be required to engage numerous more professional financial crime personnel and consultants to meet regulatory requirements.