Banks Obliged to Set Up Compliance Department

EghtesadOnline: The Central Bank of Iran in its latest directive publicized on Saturday obligates all certified financial institutions to establish an independent compliance department, as it moves to plug the hole on Iranian banks' shortfalls in meeting global anti-money laundering and combating terrorism financing regulations.

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23 October 2017

The "directive for adhering to rules and regulations in credit institutions" was officially communicated to all Iranian financial institutions on Thursday with the aim of "curbing potential damages resulting from legal fines and penalties, disciplinary punishments and adverse impacts on the reputation of banks", as mentioned in the directive's text.

It was initially approved by the CBI-led Money and Credit Council–a top decision-making body–on October 3 and must be implemented within six months from the time it was communicated, meaning that all banks and credit institutions must set up a compliance department shortly after the next Iranian fiscal year begins in March 2018.

Responsibilities of the Board

The directive puts the bulk of the compliance responsibility on the shoulders of the institutions' boards who are responsible for supervising compliance risks and devise policies to identify, prioritize, manage and control compliance risk and how to report it, according to Financial Tribune.

"The board is obligated to evaluate the quality of compliance risk management in the credit institution at least once a year," the directive said.

It is also bound to ensure the effective implementation of its compliance policies and take disciplinary measures where necessary and establish a specialized compliance committee.

The head of the committee must be selected from one of the non-executive members of the board based on professional criteria set by the CBI, and should not be a member of any other similar committee.

With regard to the compliance department, the board is mandated to clearly distinguish its responsibilities from that of internal auditing and inspection, as it must introduce someone as the head of the compliance department to CBI.

Compliance Department's Criteria

The central bank stresses that the compliance department must possess the authority and corporate standing while having complete independence and access to board members.

"The CEO, executives and staff of the credit institution must respect the independence of the compliance department and refrain from meddling in its affairs," reads the directive, adding that the compliance department's staff must not hold any other responsibilities in the financial institution.

What is more, the compliance department should get unfettered access to data from all other departments within the institution and must have at its disposal sufficient resources in terms of budget, workforce and technology, while all its workers must be experts in their fields and be constantly updated through periodical and organized training.

Compliance Department Duties

According to the CBI directive, the compliance department must ensure complete adherence to regulations at all levels of the financial institution, including independent ancillary departments and branches located offshore.

In addition to devising periodical reports, the compliance department must provide guidance where faults are witnessed and if there are numerous shortcomings, it should swiftly report them to the compliance committee and the board.

"To implement its mandate with regard to adhering to all regulations, especially precautionary regulations on combating financing of terrorism and money laundering, financial crimes and international sanctions, the compliance department must devise criteria and guidelines that are to be approved by the board," the central bank said.

As the head of the banking research and regulations department of CBI, one of the two departments that have devised the directive's structure, said international banks pay special attention to compliance when establishing correspondent relations with their Iranian counterparts, an issue that has proved highly problematic for the country.

"Lack of sufficient attention to this key issue in the past has inflicted much harm on Iranian lenders while they were cut off from the international scene at a time when the role and importance of compliance in banking were in the spotlight," Hamid Reza Ghaniabadi told Fars News Agency while referring to the immediate years after the Great Recession in 2007 and multilateral sanctions against Iran.

In its directive, CBI also set a number of criteria for the head of the compliance department and requisites for reporting on compliance.

It decrees that the head of the department must be independent and able, not hold any management or financial responsibilities elsewhere, while noting that any report drafted by the compliance department must be thorough and effective in fixing any present or future compliance issues.