Redefining Risk Management for Financial Institutions

Insurance CIO Outlook | Monday, September 17, 2018

Financial institutions have made drastic changes in risk management over the past few decades, primarily in compliance with the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations. Both the BSA and AML are part of the rules called Know Your Customer (KYC).

Risk Management Software for Bank

A typical risk management software is designed to identify and monitor risks that pose a threat in organizations. Since banking institutions cannot afford to make any mistakes, they use the risk management software to watch IT risks and breaches within the organization. On the other hand, Non-Bank Institutions (NBIs) and the banks that struggle with risk mitigation compliance typically seek the help of experts in meeting the requirements.

Risks that Financial Institutions Face

Banks operate in an environment that has numerous risks. Some of these risks include a change in the expectations of consumers, cybersecurity threats, changes in data privacy and compliance, political events, fraud threats, and changes in world events. Can you imagine the severity of the damages that these risks can cause if not managed adequately? That is why, regulations such as the BSA, AML, and KYC policies are designed to protect banking institutions.

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Bank Secrecy Act (BSA) and Office of Foreign Assets Controls (OFAC)

These two regulations imply that you should continuously monitor the customer records to protect them from criminal threats. Mainly the BSA aims at regulating the Cash Transactions Reports (CTRs) and Suspicious Activity Reports (SARs). The CTRs and the SARs include the personal information of customers. The regulations also prohibit sharing of the SARs reports to the financial institution’s board of directors. In the case of OFAC, you need to document the Blocked Person List and the Specially Designated Nationals List. These lists can include any identifying information.

Enterprise Risk Management and Financial Institution Compliance

Enterprise Risk Management (ERM) is a recent development in institutions whereby it aims at reducing fraud and risks that can significantly affect a company. Typically, ERM requires the NBFI and FI to conduct a very comprehensive analysis of credit risks. The process of FI Compliance insists on security and endpoint encryption for protecting consumers’ data on a continuous basis, highlighting the importance of ongoing alertness even on third-party vendors to safeguard outsourced data.

How FIs Monitor Vendors

Vendor management has always been hectic for financial institutions. The compliance states that you have to ensure that third-party vendors are solvent and the information about these vendors is secure. Many NBFIs and FIs include report reviews such as SOC 1 and SOC 2, which assist with vendor management practices. That is not all. You have to find a management solution to streamline the communications with the vendors.

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