Volume 4 (2020-21)

Each volume of Journal of Financial Compliance consists of four 100-page issues published in both print and online.

The articles and case studies confirmed for Volume 4 are listed below:

Volume 4 Number 4

  • Editorial
    Mario J. DiFiore, Editor, Journal of Financial Compliance
  • Practice papers
    Russia sanctions and considerations in building a sanctions compliance programme
    Cari Stinebower, White Collar, Regulatory Defense and Investigations Practice, International Trade Practice, Dainia Jabaji, International Trade Attorney, International Trade Practice and Mariana Pendás-Fernandez, White Collar, Regulatory Defense and Investigations Practice, International Trade Practice, Winston & Strawn

    The United States has maintained economic sanctions against Russia since 2014, when Russia annexed the Crimea Region of Ukraine. Over time, these sanctions have developed into one of the most complex sanctions programmes, consisting of a complicated web of trade controls that includes blocking sanctions, geographical restrictions on the Crimea Region, sanctions targeting specific sectors, export controls and the potential for sanctions on non-US Persons conducting transactions with US nexuses and even sometimes with non-US nexus, contrary to US foreign policy objectives. The challenge to adopt and implement appropriate compliance programmes is impacted by the fact that Russia sanctions affect both entities and individuals that are not directly subject to US jurisdiction. For example, transactions processed in US dollars but that otherwise do not involve US parties or counterparties may be subject to Office of Foreign Assets Control (OFAC) sanctions if a US financial institution processed or funded the transaction; additionally, US jurisdiction may be triggered by non-US Persons conducting certain ‘significant transactions’ with sanctioned persons and jurisdictions. This paper sets forth an overview of Russia sanctions, as well as recommendations to mitigate exposure to potential violations.
    Keywords: economic sanctions, Russia sanctions, sectoral sanctions, compliance programme, beneficial ownership, OFAC

  • Building better transaction monitoring for anti-money laundering
    Ashley Bostel, Associate Vice President, Product Development for Anti-Financial Crime Solutions, Nasdaq Market Technology

    Recent developments in cloud-based systems, Big Data and machine learning are transforming the anti-financial crime technology landscape. These technologies are making it easier to develop improved solutions for detecting, managing and investigating financial crime. As a result, the anti-money laundering (AML) software market is expected to grow by over US$1bn in the next four years, as traditional vendors compete with new players to exploit these new technologies. This environment is leading to exciting innovation in anti-financial crime technology with both software vendors and financial institutions challenging each other to develop the next leading AML solutions. This paper concludes that, criminals are not shackled by data privacy and international boundaries, transaction monitoring and all compliance professionals play an important role in helping to reduce human suffering and combat criminal activity. It discusses how new technologies can and will help to make AML solutions more effective and that will have a positive impact on civilisation.
    Keywords: anti-money laundering, transaction monitoring, machine learning, Big Data, cloud computing, artificial intelligence, analytics, compliance technology

  • Compliance education for the modern learner: Strategic use of videos
    Brendan Miller, Compliance Associate, Federal Reserve Bank of New York

    The phrase ‘compliance education’ can merit a bleak response. At times, institution’s compliance functions are associated with occupational constraint rather than encouraging ethical progress. Furthermore, employees overwhelmed by an abundance of trainings can experience fatigue. To encourage a positive response, strategic digital solutions that use learning mediums familiar to the user are necessary. This paper aims to provide insight on how videos can be used to improve compliance education.
    Keywords: compliance learning, compliance videos, digitisation, hybrid messaging, strategy

  • Work smarter, not harder: Artificial intelligence’s critical role in mitigating financial crime risk
    Araliya Sammé, Head of Financial Crime, Featurespace

    This paper explores the best methods financial institutions should employ when using an artificial intelligence (AI) programme in financial crime risk management. With the recent move towards AI and machine learning in financial crime and regulators strongly and increasingly promoting it, we explore what AI can achieve in this space. With the enormous benefits that AI and machine learning can bring to financial crime risk management, there come challenges, which we will outline, providing possible solutions that have been proven in data science research and implementation in financial institutions. We identify how various skill sets and capabilities combine to create the most effective machine learning programme possible, using knowledge sharing and tailored processes to achieve optimal results in risk management programmes. The proof of concept (PoC) process is explored in detail, using a past example as a case study to aid financial institutions in utilising this approach when trialling AI for their risk management programmes.
    Keywords: AI for financial crime management, machine learning for financial crime management, proof of concept for financial crime, financial crime management skill sets, financial crime management processes

  • Leveraging human and financial resources to meet higher compliance expectations
    Dr Ilona Niemi, Group Chief Compliance Officer, The Co-operators Group Limited

    The ongoing digitalisation and data-driven approaches in financial services require compliance functions to meet higher expectations. The compliance teams have increasingly obtained a role as trust enablers for the corporate brand and guardians of company reputation. To deliver value in the digital age, compliance must focus on outcomes at the company level instead of delivering outputs. This will require compliance to optimise and refine the interaction of human and financial resources at a higher level. To be in a position to meet these higher outcome expectations, compliance functions are required to enable holistic oversight across all entities and jurisdictions. This will require viewing compliance programmes as a system consisting of people, processes and tools. The recent Citibank case from October 2020 related to deficiencies in enterprise-wide and compliance risk management, as well as its data governance and internal controls, is leveraged to frame the selected approach. This paper defines three core levers which are required to be in place in order to introduce holistic compliance oversight based on system thinking: a new collaborative compliance programme governance, a single source of truth technology and a rigorous prioritisation of compliance talent agenda.
    Keywords: compliance outcome, compliance budget, trust, reputation, digitalisation, data-driven, Citibank case, holistic compliance oversight, compliance programme, collaborative governance, single source of truth, governance risk compliance (GRC), compliance talent

  • Challenges presented by AML in the areas of distribution, account opening and client relationships
    Vitali Schetle

    Anti-money laundering and counter-terrorist financing (AML/CTF) rules are currently undergoing fundamental changes. A comprehensive legal and regulatory framework has been put in place by lawmakers and national regulators, particularly in recent years. Market participants, however experience challenges when implementing this framework in their business models. These challenges have a range of causes: multifaceted business interests and needs of various market participants, differing levels of (legal) risk appetite to interpret and implement this framework and complex business models of different financial service providers, just to mention a few. The paper presents current challenges and possible solutions when implementing the AML/CTF rules in both distribution and account opening. In distribution, sub-distribution, global distribution, platforms, including settlement platforms, and private placement distribution set-ups are analysed from the AML/CTF perspective in addition to conventional distribution activities. The activity of the global distributor of the investment funds is also focused on. The paper also gives AML/CTF-relevant insights into the activities of UCITS management companies and AIF managers as well as into the delegation framework under Luxembourg law.
    Keywords: distribution, sub-distribution, global distribution, platforms, private placement, account opening, UCITS management company, AIFM

  • Putting an end to snow-washing: The case for a publicly accessible corporate registry of beneficial owners in Canada
    James Cohen, Executive Director, Transparency International Canada and Sasha Caldera, Beneficial Ownership Transparency Campaign Manager, Publish What You Pay Canada

    The term ‘snow-washing’ was discovered by Toronto Star and CBC journalists investigating the 2016 Panama Papers. The term allegedly comes from the intermediaries at Mossack-Fonseca, the law firm at the heart of the Panama Papers, where they essentially sold Canada with the idea of bringing dirty money to Canada and it will be cleaned like the pure white snow; hence, ‘snow-washing’ entered the Canadian anti-money laundering (AML) lexicon. This reputation came about because Canada has a weak corporate transparency regime, with exceptionally little beneficial ownership reporting and AML enforcement. Canada’s beneficial ownership gaps have been known and reported by international organisations for some time. There have been a number of AML updates in Canadian regulations in preparation of the 2021 Financial Action Task Force (FATF) peer review, but as of writing, the largest piece of the enforcement puzzle has been whether a publicly accessible beneficial ownership registry will be implemented. In this paper, we argue why a publicly accessible beneficial ownership registry is a critical tool that Canada can implement to end snow-washing. To make the case for a publicly accessible beneficial ownership registry, we will discuss the background of Canada’s beneficial ownership regime; global trends and findings on beneficial ownership registries and how Canada can navigate the challenges of implementing such a registry in a federated country as well as balance privacy concerns.
    Keywords: beneficial ownership, antimoney laundering, public beneficial ownership registry, Canada, PCMLTFA

Volume 4 Number 3

  • Editorial
    Mario J. DiFiore, Editor, Journal of Financial Compliance
  • Practice papers
    Managing conduct risk during a pandemic
    Victoria Stubbs, Chief Risk Officer, The Cambridge Building Society

    The coronavirus pandemic (COVID-19) has drastically altered the operating model of almost all financial services firms, and staff are operating through a period of heightened stress. This paper discusses how firms need to ensure they respond rapidly to the changes to the external environment. The paper analyses how, while firms will need to update the risk-management basics of risk and control registers and second line of defence monitoring, the key driver to ensuring that conduct risk is well managed will be culture. It discusses how the Board will play a crucial role in ensuring that the desired customer outcomes are met as well as supporting all staff through this period. Regulators will be challenging firms as to how they have met the expected standards and remained within risk appetite. Culture will be a key factor in ensuring that firms continue to look after the interests of their customers.
    Keywords: conduct risk, pandemic, culture, risk management, board oversight, COVID-19

  • Compliance lessons in recent Office of Foreign Assets Control enforcement
    Ben Hutten, Counsel, Buckley

    In May 2019, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC), which administers US sanctions laws, issued a broad framework identifying what OFAC views as the essential elements of risk-based sanctions compliance. At the same time, OFAC announced that it would consider how well these elements have been incorporated when considering its enforcement response to sanctions violations. While providing general guidance, the framework provides little in the way of practical detail to assist financial institutions with incorporating the framework into their organisations. Perhaps in recognition, OFAC recommended that all organisations review enforcement actions published by OFAC for purposes of reassessing and enhancing sanctions compliance. This paper is intended to help financial institutions comply with OFAC’s recommendation by identifying critical guidance and common pitfalls in a survey of post-framework enforcement actions.
    Keywords: OFAC, sanctions, screening, diligence, risk assessment, enforcement, training, sanctions evasion, false hits

  • The United Kingdom’s client assets regime: Problematic issues of threshold application
    Carl Fernandes, Partner and Kishore Bhindi, Associate, Latham & Watkins

    This paper considers certain difficult legal threshold matters of application in relation to the United Kingdom’s client assets regime. Consideration of such matters is especially timely as the regime transitions from a period of rapid change to a more business-as-usual environment. Topics covered include title transfer collateral arrangements, mandates and evidencing compliance with the Senior Managers and Certification Regime.
    Keywords: client assets, client money, TTCA, best interests, appropriate

  • Cloud concentration risk: A framework agent-based model for systemic risk analysis
    Richard L. Harmon, Global Head of Financial Services, Cloudera, Perukrishnen Vytelingum, Head of Quantitative Modelling and Jiyan Babaie-Harmon, Simulation Engineer and Operations Manager, Simudyne

    This paper provides a brief overview of key trends in cloud adoption and cloud deployment strategies, how global regulators are evaluating cloud-related operational risks and how might they deal with these potential risks in the future. Furthermore, the role of recent innovations in the Big Data and Analytics space has resulted in a next generation hybrid, multicloud architecture that addresses many of the near-term operational risks that regulators have identified with public cloud adoption. The last section of this paper outlines a framework agent-based model (ABM) that can be the foundation for regulators, market participants and cloud service providers (CSPs) to evaluate these types of risks. This approach can identify potential contagion trigger points that can lead to cloud-driven systemic risk events. The authors demonstrate how this framework ABM can be extended to evaluate regulatory policies under different criteria and market structures. Future research points to the integration of Evolutionary Game Theoretic configurations that could help determine the effectiveness of potential regulatory policies as well as identify circumstances where suboptimal regulatory and compliance outcomes arise.
    Keywords: cloud outsourcing, operational resiliency, regulatory oversight, cloud concentration risks, agent-based simulation modelling

  • US sanctions enforcement focus on mergers and acquisitions
    F. Amanda DeBusk, Partner, and Jean Chang, Associate, Dechert

    Sanctions compliance is an increasing challenge facing multinational companies subject to US sanctions laws as companies are trying to achieve well-defined compliance programmes in a rapidly evolving regulatory environment. Further adding to these challenges is the difficulty of conducting due diligence for mergers and acquisitions (M&A) in a pandemic, coupled with the time pressure of performing due diligence on sanctions risks before the deal is done and integrating sanctions compliance processes after the deal has closed. As shown in recent enforcement cases, more and more companies are making disclosures to US authorities of sanctions violations arising out of their M&A activity, and penalties reach millions of dollars. In this paper, the authors explore the types of sanctions compliance violations that arise as a result of M&A transactions and recommend best practices that companies should follow to avoid these complications.
    Keywords: sanctions compliance, multinational companies, US sanctions laws, compliance programmes, regulatory environment, due diligence, mergers and acquisitions

  • Identifying and mitigating ‘conduct risk’ in algorithmic FICC trading
    Alexander Culley, Chartered Fellow, Chartered Institute for Securities and Investments

    From 31st March, 2021, pursuant to the Senior Managers and Certification Regime (SMCR), British investment firms are required to have performed their first fitness and propriety assessments of persons overseeing the deployment of trading algorithms. Inherent in this requirement is an assumption that natural persons will continue to play the leading role in algorithmic design and calibration for the foreseeable future. Popular non-fiction works), however, are evocative of a future dominated by artificial intelligence with significant levels of autonomy. Building on his recent review of the extant literature concerning conduct risks and their mitigation in algorithmic trading (AT) firms (Culley, 2020), the author proposes a research agenda to assess if initiatives such as the SMCR are considerate of new conduct risks that could emerge in the machine age. Favouring a pragmatic epistemology that the author asserts is consistent with the Financial Conduct Authority’s (FCA) own approach to regulation, the author suggests three possible research strategies (case studies, mixed methods and action research) that could be employed by researchers interested in this topic, before settling on what the author considers to be the most suitable strategy for his own study. In addition, the author provides details on the primary data (elite interviews, focus groups) and secondary data collection techniques that will be utilised, together with an insight into appropriate sampling and data analysis methods. While the author plans to use this research agenda in the context of AT in the fixed income, currencies and commodities markets because of the dearth of studies in this area, it is hoped that it will inspire other scholars to conduct examinations into the conduct risks posed by the automation so that both policymakers and firms can make informed decisions regarding their mitigation in the future.
    Keywords: conduct risk, algorithmic trading, high-frequency trading, FICC markets, artificial intelligence, FCA and SMCR

  • Best practices in compliance training
    Lori Weston, Managing Director and Jennifer Hoopes, Senior Managing Director and General Counsel, FORESIDE

    Compliance impacts almost every facet of an organisation. In order for an organisation’s compliance programme to be effective, however, it is imperative that the firm have a well-planned, comprehensive compliance-training regimen. Even the most comprehensive compliance programme is ineffective if staff have not been trained on the programme, do not understand the firm’s policies and procedures, and have not been educated on their own responsibilities in carrying out the programme. This paper discusses the importance of placing structure around a firm’s compliance training and explore themes that should be considered in evaluating such a training programme. Themes discussed include compliance-training programme content, audience, format, timing, implementation, documentation and programme effectiveness.
    Keywords: compliance, employee training, staff education, job responsibilities, training programme

Volume 4 Number 2

  • Editorial
    Mario J. DiFiore, Editor, Journal of Financial Compliance
  • Practice papers
    An oversight framework to keep senior executives in control
    Richard Pike, Founder and CEO, Governor Software

    Given the current regulatory focus on senior management responsibility and the resultant requirement for high-quality oversight of processes and controls, this paper sets out an approach to instantiating such an oversight process in the 1st line of defence. As most financial firms are subject to huge change, the paper then goes on to show how such an oversight process might dovetail with a regulatory change process. In order to more clearly explain the approach, the paper then describes a short case study from a large US bank who successfully ran such a project in 2019. Finally, the paper will set out the benefits to be accrued from taking this path to high-quality oversight.
    Keywords: oversight, 1.5 line of defence, regulatory change, knowledge graph

  • Cross-border crosswalk: An overview of Canadian and US banking and consumer financial services regulators
    Suhuyini Abudulai, Partner, Cassels Brock & Blackwell, Xiaoling Ang, Associate Director, NERA Economic Consulting, Eric Goldberg, Partner and Thomas Kearney, Partner, Akerman

    Canada and the United States are neighbours, each with its own ‘alphabet soup’ of banking and consumer financial services regulators. Many institutions in each country are under the purview of both federal and state/provincial regulators, and some institutions may be supervised by multiple financial regulators. For businesses engaged in financial services on either side of the border, it is important to understand which agencies regulate the products and services they offer and how agencies policies change over time. Understanding how local regulatory environments differ should inform business decisions. For example: (a) There may be costs associated with expanding to a new jurisdiction as there are likely different compliance requirements. (b) A product that is viable in one area may be untenable in another due to differing regulations (eg varying usury limits). (c) Litigation risk may differ between jurisdictions: various US regulators can file lawsuits in federal court whereas Canadian regulators often have supervisory and regulatory powers that do not include prosecution. US companies are also often able to insulate themselves from class action liability through the operation of arbitration clauses and class action waivers. (d) Companies seeking to do business in both the United States and Canada should consider engaging legal and expert teams during product development to harmonise where possible. Additionally, when facing regulatory scrutiny or litigation, similar harmonisation may be beneficial as well. Navigating the oversight of each agency is nuanced within each country, and one’s knowledge, experience and jargon are often specific to their area of expertise. Regulated entities’ incentives may differ due to differences in regulation or licensing requirements. Engaging with and retaining expertise (eg staff, counsel or external experts) in one country who have the tools and language to work with people in another can be valuable. To help with that, this paper provides an overview of the legal framework, financial services landscape and key regulators in Canada and the United States.
    Keywords: Canada, United States, regulation, banking, consumer finance, consumer protection, FinTech, compliance

  • Increasing cybersecurity awareness and fluency for compliance risk management
    E.J. Yerzak, Director, Cyber IT Group and Michael Farrell, Cybersecurity Consultant, Ascendant Compliance Services

    This paper aims to explain the fundamental cybersecurity concepts that financial compliance professionals should know as well as shed some light on certain advanced cybersecurity concepts that are meaningful to understand. Knowledge of such technical terminology can enable effective communication between the compliance function, the information technology department, other members of senior management, third-party vendors, and inevitably, regulators.
    Keywords: cybersecurity, privacy, encryption, access control, data breach, risk management

  • Applications of machine learning in the identification, measurement and mitigation of money laundering
    Nikhil Aggarwal, Managing Director and Sean Wareham, Associate, Promontory Financial Group, an IBM Company and Rasmus Lehmann, Data Scientist, IBM Client Innovation Center

    The cost of financial crimes compliance continues to grow, locked in step with increasing regulatory expectations and volumes of low-productivity work items. Financial institutions cannot afford to wait for entirely new paradigms and instead are investing in solutions that provide near-term relief and can orient institutions towards the future. Technologies like artificial intelligence and machine learning (ML) — well entrenched in applications like credit risk modelling and fraud detection — are gaining traction within the broader financial crimes domain, and anti-money laundering (AML) in particular. To obtain the business value of these ML and other technologies, financial institution managers need the toolset to succinctly understand these methods and assess what approaches are appropriate and effective for their institutions. The twofold goals of this paper to equip institutional stakeholders with this information are: 1. Describe the high-level applicability of ML to AML, with a focus on transaction monitoring. 2. Provide an overview of the AML ML practices that are already in place within the industry; are on the immediate horizon; or are promising opportunities actively being investigated for the future.
    Keywords: anti-money laundering, financial crimes, analytics, machine learning, artificial intelligence, algorithms, models, RegTech

  • The account review
    Duane E. Lee, Executive Vice President, Cannon Financial Institute and Michael Daly, Director of Risk Management and Operations, Pohl Consulting and Training

    The account review is a fundamental component of modern business. They are a strategic and detective tool to assess both performance and satisfaction. Successful account reviews provide an opportunity to grow relationships and reaffirm commitment to an account’s success, whether the account under review is a client, or a vendor. For a fiduciary, organised under US law, the account review represents not only an industry best practice, but a regulatory requirement. A successful fiduciary account review is not an assessment of risk alone. It also validates expectations. Expectations about quality of performance, and validation that all contractual obligations are being met. The account review can corroborate achievements and identify gaps in compliance. It is also a tool to identify and address unnecessary exposure to risk. For trust companies, the fiduciary standard binds a trustee to always act in the client’s interests above their own. The account review ensures adherence to requirements of the contract, and to the mandates of law. A fiduciary is an ethical custodian who must adhere to both the letter of law, but also the spirit of law, while always being obedient to the duties of loyalty and impartiality. The account review provides governance and oversight and helps senior management and the Board of Directors to measure potential exposure to client dissatisfaction, or even litigation. This paper explores six separate and distinct account reviews required during the life of a trust account, which provides a comparative roadmap that could be aligned to any number of other business disciplines.
    Keywords: account review, preacceptance review, postinitial acceptance review and/or postacceptance review, administrative review, investment review and/or Reg. 9 review and/or Regulation 9 review, account closing review, watchlist

  • The legal and economic implications from recent UK spoofing cases
    Greg Leonard, Vice President, Yan Cao, Vice President and Marlene Haas, Manager, Cornerstone Research and Gregory Mocek, Partner, Allen & Overy

    UK and US financial market regulators have intensified their efforts in securities and commodities markets to detect and pursue the type of disruptive trading behaviour referred to as ‘layering or spoofing’. Surveying the legal landscape of spoofing prosecutions and actions across the Atlantic, the authors note the UK’s fewer publicly announced enforcement actions relative to the USA. The UK has, however, taken a number of actions in recent years that signal its commitment to enforcing laws against market manipulation in general, and spoofing in particular. The authors discuss legal and economic implications of two prominent examples of UK spoofing cases: the Financial Conduct Authority’s (FCA) investigation of Michael Coscia and FCA vs DaVinci. The authors find that although the trading strategies employed by Coscia and DaVinci were different in some aspects, the two cases share important common characteristics that regulators appeared to have relied on to determine whether the conduct constituted ‘spoofing’.
    Keywords: market abuse regulation, enforcement, disruptive trading, order book manipulation, spoofing

Volume 4 Number 1

  • Editorial
    Mario J. DiFiore, Editor, Journal of Financial Compliance
  • Managing material information around equity accelerated bookbuilding offering
    Lorena Bernardi, Senior Officer, Market Abuse Investigation Unit, Consob

    This paper examines the informational aspects connected to the accelerated bookbuilding offering (ABO) concerning listed shares, highlighting the critical issues about the relationships between the various subjects involved — such as the seller, the financial intermediary, ie the bookrunner, the potential investors contacted to assess their interest in the transaction (procedures of wallcrossing), the investors participating in the sounding and placement — as well as the critical issues related to the announcement of the transaction and its effects on the price discovery process. In particular, the risk of disclosing inside information and insider trading are examined, using the experience of Italian markets as a case study. In this context, the relevance of taking into account the reasons behind the transaction, both for the market and for the bookrunner, is highlighted, as these reasons could constitute autonomous inside information with respect to information related to the placement, ie price and size of the transaction. Based on ABOs carried out on the Italian market between January 2010 and February 2020, the preceding reasons and the seller’s type (whether a controlling shareholder, a minority shareholder or an issuer) seem to be relevant in defining the discount associated with the ABO and, therefore, its price impact. In conclusion, hints are sketched for a possible internal procedure the bookrunner could consider to optimise its activities related to the detection of market abuse.
    Keywords: accelerated bookbuilding offering, market sounding, market abuse, insider dealing, discount, placement

  • Benefits of aligning AML and ABC compliance
    Michelle Goodsir, Managing Director, K2 Intelligence FIN

    Antimoney laundering (AML) and antibribery and corruption (ABC) programmes, by themselves, are important tools in addressing problems that are global in scope. While AML and ABC programmes are distinct, they also entail complementary skills, which reflect the nature of the financial crimes they are designed to prevent. Although AML and ABC programmes have historically operated independently, it no longer makes sense to perpetuate that separation. AML and ABC can, and should, collaborate to enhance their effectiveness. The challenges facing AML and ABC programmes are numerous and sizable. Many financial institutions, particularly domestic regional or community banks, must manage the expense of compliance and limited resources, in terms of skilled staff as well as budgets. Nevertheless, they must recognise an immutable fact: the cost to prevent financial crimes is a fraction of the cost to remediate them. The stakes in AML and ABC have never been higher, but there are ways to mitigate the risks of both today and tomorrow. Institutions can strengthen their compliance programmes by aligning their AML and ABC teams. This paper will discuss the challenges ABC and AML programmes have historically faced, and provide tangible solutions for bringing the two verticals together to create efficiencies and enhance the efficacy of entities’ financial crimes compliance programmes.
    Keywords: financial crimes compliance, anti-money laundering, antibribery and corruption, ABC, AML, compliance

  • Conduct risks and their mitigation in algorithmic trading firms: A systematic literature review
    Alexander Culley, Chartered Fellow of the Chartered Institute of Securities and Investments

    Trading floors are evolving. While popular culture still reveres antiheroes, such as Nick Leeson, Jordan Belfort and Gordon Gekko, dealing rooms have been gradually falling silent in our Digital Age. Increasingly intelligent algorithms are supplanting human traders and brokers, replacing emotion with the raw power of calculation. What implications does this have for the behaviour of firms active in the financial markets in the 21st century? How should firms and their regulators adapt to mitigate the conduct risks inherent in fully automated and hybrid business models? This systematic literature review adopts an interdisciplinary approach to examine how far research has answered these questions in the context of the British and European fixed income, commodities and currency (FICC) markets. Widely regarded as one of the ‘final frontiers’ for full automation, the FICC markets are currently characterised by a mixture of traditional (eg voice brokerage), ‘hybrid’ (machine–human) and challenger (eg highly automated trading utilising sponsored access) techniques. Accordingly, they represent fertile ground to: (a) gauge the tension that exists between these methods of trading and (b) test potential solutions to mitigate new forms of conduct risk.
    Keywords: algorithmic trading, artificial intelligence, conduct risk, high-frequency trading, machine ethics, machine learning

  • Target quality review of internal risk models and how to inspect them
    Jörg Orgeldinger, Economist and Data Scientist

    The European Central Bank performs a targeted review of internal models with the objective of reducing the variability in risk-weighted assets (RWAs). This will be accomplished by harmonising practices and checking the compliance of Pillar 1 internal models of credit risk (CR), market risk (MR) and counterparty credit risk (CCR) with regular requirements. The paper will help assessment teams with guidance on which situations should trigger findings, covering a selection of mandatory key variables and allowing for additional tests to be performed. Specific attention will be paid to the different core banking systems and data sources that are used through to the (historical) risk database identified in the inspection. Although the fact that the information technology architecture and infrastructure for the credit rating systems are mode-specific, a simplified process will be outlined throughout the paper to illustrate the main process steps, systems and datasets. Targets are the retail and corporate small medium enterprises (SMEs) portfolios, including information based on personal experiences of the author. For the future, more sophisticated methods like artificial intelligence and machine learning, as described in literature, need to be found and applied.
    Keywords: risk models, data quality, PD and LGD tests, market risk, collateral value

  • Anti-bribery and corruption compliance in Nigeria
    Austin Mbadugha, Partner, NICCOM

    Compliance has received increased attention since the late 1990s. Countries have either enacted new and stronger laws and/or increased enforcement of existing laws to address specific areas, especially in the areas of bribery and corruption, money laundering, labour and data privacy. As will be seen, the laws of certain countries have extraterritorial impact, and are able to sanction crimes committed outside the shores of such countries. What is the status of the law in Nigeria in relation to anti-bribery and corruption (ABAC)? This paper seeks to offer a broad definition as to the meaning of bribery and corruption, as well as highlight the regulatory framework for ABAC compliance in Nigeria. It also provides guidance for businesses in Nigeria as to the leading practices to prevent, detect and respond to incidences of bribery and corruption.
    Keywords: anti-bribery and corruption, compliance, adequate procedures, failure to prevent bribery, FCPA, UKBA, official bribery

  • Evolving regulation and the role of compliance since the 2008 financial crisis
    Kami Niebank, Deputy Chief Compliance Officer and Justin Walker, Assistant Division Chief, CalPERS

    This paper examines the root causes of the 2008 global financial crisis, key regulatory changes in response to the crisis, and the evolving role of the chief compliance officer as a result. Key regulatory changes examined include: the Dodd–Frank Wall Street Reform and Consumer Protection Act, US Basel III and recent guidance around cyber risk management and virtual currencies. In addition, the paper explores the changing role of both the chief compliance officer and compliance programmes. Prior to the 2008 financial crisis, compliance was often seen as a support function and after-thought in decision-making. The compliance pressures and expectations this past decade have, however, caused many organisations to place a greater emphasis and higher demands on their compliance teams.
    Keywords: financial crisis, regulatory reform, role of compliance, compliance review