Implementing compliance policy internationally: the success factors
Companies do not always succeed in translating their policies into frameworks that work in practice. It is often only after an incident or an order from a regulator that it becomes clear that the policy has not been implemented as intended. International organisations face the additional challenge of greater distance, both literally and figuratively. Differences in laws and regulations, organisation and culture can make it difficult to translate corporate policy into a practical and auditable framework.
Projective Group has assisted a number of financial institutions, mostly banks, with the implementation of their compliance policies and remediation plans in their overseas operations. In this article we have summarised our collective experience. We outline the challenges and provide practical advice on how to make the implementation of a compliance policy in an international context a sustainable success.
What potential challenges can organizations be faced with when implementing compliance policy across national borders?
The interpretation of laws and regulations varies from country to country.
The local regulator influences how strictly a branch can (and will) comply with the corporate policy rules.
Policy monitoring is limited because the compliance function is organized differently.
Processes and systems impede correct implementation.
The rollout of policy does not match the common way of working locally. This can lead to incomprehension and – unintentionally – to careless implementation of corporate policy rules.
In this article, we provide a more detailed explanation of these potential bottlenecks. In addition, we explain our approach to analyzing and solving these bottlenecks.
Bottleneck: Ambiguous interpretation of laws and regulations
Financial supervisory laws and regulations are more and more based on international/European legislation. However, EU legislation still needs to be transposed into national legislation by every individual country. This can result in different interpretations and distinct national laws and regulations.
For example, currently the concept of pre-marketing leads to a lack of clarity among investment institutions and companies as to whether or not they are subject to licensing or registration requirements.
Altogether, this complicates the process of defining company policy and setting-up unambiguous procedures across national borders. It also makes it difficult to demonstrate adherence to compliance standards locally and at the corporate level.
Our approach is aimed at comparing all legal frameworks applicable to the organization, according to local laws and regulations. The main focus is on the laws and regulations of the country where the license is issued and where the central regulator is seated. The location of the branches (inside or outside the EU/Single Supervisory Mechanism) is also taken into account in the analysis.
This analysis of the differences in legal frameworks is the basis for a local rollout or remediation plan. Material differences are recorded at corporate level. In some cases, this can lead to procedures in which countries can request a waiver for specific corporate policy rules.
Bottleneck: The influence of the local regulator
The way in which local supervisory authorities enforce local laws and regulations influences the willingness and ability of individual branches to comply with central guidelines. For example, financial (supervisory) legislation in the Netherlands is often principle-based. In other countries, a rule-based approach is more common. In these countries, the branches often have a greater need for specific instructions. In general, we notice that the smaller the risk of enforcement by a local regulator, the greater the risk that a local organisation will take a “loose” approach to central policy rules.
Another scenario is that the rules in the country in which a branch is located deviate from the standards set by the central authority and the corporate policy. For example, the definition of politically exposed persons (PEPs) in some EU countries differs from that in the Netherlands. The same applies to the rules that define which products are in the scope of Customer Due Diligence (CDD) and which can be excluded. In our experience, this can lead to debate and confusion at the corporate level about how the policy should be applied (and how strictly).
Analysis of the practice of the local supervisory authority is explicitly addressed when identifying gaps in local jurisdiction. For each country or branch involved, we show:
whether a local banking licence was issued;
the specific services that this licence applies to;
how local laws and regulations, standards and guidelines compare to those in the supervision of the central regulator.
We also consider whether any waivers or exemptions apply. On the basis of this analysis, we define measures to bring the activities and procedures of the foreign branch into line with central policy.
Bottleneck: The position of the local compliance function
It is important to assess whether there are differences in the activities and responsibilities of the compliance function in a foreign branch compared to the head office. These differences are often related to the size of the branch and the span of control of the compliance officer. We have seen branches where the compliance officer spends most of his time on first line activities such as CDD. In some countries, compliance tasks are performed in the risk area. The compliance function may also be influenced by specific local legislation. For example, in a number of European and non-European countries (e.g. UK, Turkey, USA), the second line function is personally liable in the event of misconduct.
By assessing the local position of a compliance officer, we can identify the risks and key success factors of a compliance-related project and tailor our approach accordingly. For example, in a remediation programme, the role of the first line problem owner and the role of the person responsible for independent monitoring should be separated before the programme starts. It is also a good idea to actively involve the compliance officer in conducting cross-border gap analyses. These insights can be used by the compliance officer when performing second-line monitoring and advisory functions.
Bottleneck: Differences in working methods and culture
As one Spanish colleague pointed out: I love working with the Dutch, you’re so well organised. But don’t tell me what to do all the time. And stop sending me spreadsheets to fill in.
The above quote illustrates the way the Dutch are used to working together: with formal roles and established lines of communication. Efficient and predictable. It also shows that this way of working does not automatically lead to acceptance in foreign offices. Sometimes it is necessary to take into account different decision-making processes. In the Nordic countries, for example, consensus is an important prerequisite for implementation.
It is also important to bear in mind that local norms and values may vary considerably from country to country. For example, tax avoidance is not considered equally undesirable in every country.
Our approach is to gain a broader understanding of local working practices. The focus is on those elements that are critical to the success of the policy.
What are local processes like?
What systems and documentation are used?
Why do people in a local office work in a certain way?
What do they focus on?
What is the decision-making process and how are decisions communicated?
Who are the key stakeholders?
What is the level of knowledge of laws and regulations and, more importantly, what is the attitude towards compliance?
On the one hand, understanding the local way of working provides an insight into the operational gaps that need to be filled in order for the compliance policy rules to be effective. On the other hand, this approach provides an opportunity to raise local awareness through on-the-job training. Our focus is on sharing best practice across the business.
Investing in the local workplace also has long-term benefits: it makes it easier to stay in touch and discuss potential bottlenecks with head office.
In our experience, remote communication is possible. Today, there are sufficient (electronic) means of communication to enable remote communication between branches. Nevertheless, a physical presence in a local office can be an in-depth investment that reduces the risk of future (repair) costs. It can also reduce potential language barriers.
Want to know more?
We use an integral contextual analysis and assessment when rolling out a corporate policy across borders. By integral, we mean with the active involvement of key local stakeholders and with a focus on all relevant underlying processes. The key to our approach is to bring together knowledge from different sectors and levels of the organisation. We combine our compliance expertise with our business, project and change management experience.
We have extensive experience in supporting international financial organisations. Our support includes:
Establishing global corporate policies on compliance issues (such as anti-money laundering);
Implementing policies, systems and procedures globally;
Leading compliance remediation projects;
Filling compliance management positions (on an interim or long-term basis).
Wondering what we can do for you? Please do not hesitate to contact us.