A compliance function is formulated by every bank; it ensures rigid observance of all statutory provisions contained in much legislation such as the Banking Regulation Act, Reserve Bank of India Act, Foreign Exchange Management Act, and Prevention of Money Laundering Act etc. In addition, it also ensures observance of other regulatory guidelines issued from time to time, standards and codes stipulated by IBA, FEDAI, FIMMDA, etc. Compliance laws, rules and standards typically cover matters such as observing proper standards of market conduct, managing conflicts of interest, treating customers equitably and securing the suitability of customer advice. In addition, they typically include specific areas such as preventing money laundering and terrorist financing and may extend to tax laws relevant to structuring banking products or customer advice.

The Basel Committee on compliance function explains compliance risk as “the risk of legal or regulatory sanctions, material financial loss or loss to reputation a bank may bear as a result of its failure to follow the laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to its banking activities.” Accordingly, the compliance area is critically important in identifying, evaluating and addressing legal and reputational risks. Moreover, given the significance of these risks, a strong group/enterprise-wide compliance program is necessary for banks. This program could help management and the board understands where the organization’s legal and reputational risks are concentrated, provide collations of the level and changing nature of risks, and recognize those control processes that most need enhancement.

A robust compliance system in a bank should include a well-documented compliance policy outlining the compliance philosophy of the bank, the role and set-up of the compliance department, the constitution of its staff and their respective authorities. The policy should be evaluated annually by the board.

Mainly, the policy should include the following aspects:

• They are setting up an independent compliance department at the head office with a senior executive heading it with sufficient support staff and specifying its role and responsibilities.
• Compliance structure in controlling offices and branches specifies each functionary’s role and responsibility in the compliance units.
• Measures to ensure the independence of the compliance function- it would be mandatory that the remuneration of the compliance functionaries is not connected to the business line for which they exercise compliance responsibilities. However, it could generally be related to the bank’s financial performance.
• Focus on regulatory compliance, statutory compliance, compliance with fair practice codes and other codes prescribed by self-regulatory organizations, government policies, bank’s internal policies and prevention of money laundering and funding of unlawful activities.
• Monitoring compliance testing plan.
• Right of the compliance function to obtain the data necessary to carry out its responsibilities and direct investigations of possible breaches of the compliance policy.
• Association between the chief compliance officer and head of other functional departments.
• Mechanism for disseminating information on regulatory matters among operational staff and periodic updating of operational manuals.
• The compliance department’s acceptance of all new processes and products before their introduction.
• Right of the compliance function to openly disclose its findings and views to senior management, board/ ACB or board committee.

The board would be accountable for ensuring that an appropriate compliance policy is in place in the bank to manage compliance risk and oversee its implementation. In addition, it has to make sure that compliance issues are resolved successfully and rapidly by senior management with the assistance of compliance staff. If required, the board may assign these tasks to the Audit Committee of the Board (ACB) constituted for the purpose.

Senior management should, with the help of the compliance function:

• Once a year, recognize and assess the main compliance risk facing the bank and formulate the plans to manage them.
• Submit to the board/ ACB quarterly and annual reviews in such a manner as to assist board members in making an informed judgment on whether the bank is managing its compliance risk productively; and
• Report quickly to the board of directors or the ACB on any material compliance failure.

At MAS, we assist with the following services under RBI compliances:

• Making applications to Reserve Bank of India for purchase/ sale of shares, debentures and securities and directly to and from residents in India and outside India.
• Compliance with foreign direct investment (FDI) regulations and getting regulatory approvals
• Compliance with the procedure, including Chartered Accountants Certification for repatriation of income/assets from India.
• Transfer of shares from Indian residents to non-residents.
• Setting up joint venture/ wholly-owned subsidiaries by NRIs or persons of Indian origin.
• Issue of statutory certificates under FEMA and RBI regulation.
• Other advisory services on FEMA/RBI.