Identifying potential red flags can help develop effective compliance program - Mary Beth Guard

Identifying potential red flags can help develop effective compliance program
by Mary Beth Guard, BOL Guru
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The Federal Reserve Bank of Kansas City drafted a guide to developing an effective compliance program a while back. It identifies four compliance "red flags" - situations where an institution's susceptibility to compliance problems may increase.

If these "red flag" situations occur, heightened compliance attention may be warranted. The four they list are:

Rapid growth/new branches/mergers - Compliance resources may be stretched during periods of expansion. Sometimes, compliance becomes a secondary concern, thus allowing problems to take hold and spread quickly. Acquisitions of existing banks or establishment of de novo branches often results in compliance difficulties. Managing compliance for several branches presents different compliance challenges than at a single office. Computer conversion issues and new personnel associated with expansion are also compliance management "red flags."
Employee turnover - Whenever trained staff members are replaced, the possibility of errors increases. Timely training and written procedures are critical. Additionally, "succession plan" for all compliance related responsibilities may help ensure that another employee is trained and available to proceed with compliance tasks, at least on a temporary basis.
Computer conversions - Whenever there is a change in an institution's computer systems, compliance errors are likely to occur. During testing phases of the conversion and once the new system is running in production mode, it is important to check to ensure continued compliance. Disclosures and system calculations should be reviewed after computer conversions. Small changes to computer systems, such as adjusting interest rates or minimum balance requirements, may also result in unexpected errors. Reviews of system output after such changes may reduce compliance errors.
Reprinting of standard forms - Standard forms should be carefully scrutinized when reprinted, especially when changes were made.

To their list, I'd like to add a few red flags of my own:
Changes in laws and regs - A month before the CIP requirements were to go into effect, I taught a New Accounts seminar. One banker who headed up her institution's new accounts department was totally unaware of the CIP rules, even though their effective date was imminent. The information simply had not filtered down to all the necessary parties. In terms of red flag dangers, new laws and regs, and changes to existing ones, present potential problems not only because of the fact that the institution may fail to make affected parties aware of the changes, but also because lack of training or guidance may result in misinterpretations of the new requirements that result in the institution being out of compliance from day one. Inadequate planning can lead to insufficient time being allowed to make operational adjustments.
Implementation of automated systems - Automated systems for setting up new accounts and documenting loans can lead to greater efficiencies and can allow an institution to better serve its customers. Problems can arise, however, if employees believe that use of an automated system absolves them of the responsibility to be familiar with the actual legal requirements. With any automated system, it's Garbage In, Garbage Out.
Charter conversions - If an institution moves from a state to a national charter, or vice versa, there's a learning curve that must be surmounted. While there are great similarities in the legal requirements, differences do exist and must be observed.
Crossing size or geographic thresholds - Some requirements change, or take effect, only when an institution crosses particular size thresholds (such as the large bank CRA rules) or establishes an office in a particular geographic locale (such as HMDA). The compliance effect of geographic expansion and/or size growth must always be considered.

The original version appeared in the April 2004 edition of the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 8/9/04