Risk Management and Regulatory Compliance ??????? Asia Pacific Finance and Development Center ????????? World Bank Institute ??????

1
Risk Management and Regulatory
Compliance???????Asia Pacific Finance and
Development Center????????? World Bank
Institute??????

• Alex Vanderpol
• June 19, 2008

2
Compliance advises on compliance risk ???????????

• Compliance risk is the risk of
• legal or regulatory sanctions,
• material financial loss, or
• harm to reputation
• that a bank may suffer as a result of its failure
  to comply with
• relevant laws, regulations, principles and rules,
  standards and codes
• of conduct applicable to its activities, in
  letter and in spirit.
• ??????,??????????????????????????????????,????????
  ???????,????????,???????????

3
Compliance provides a central role in monitoring
delivery and minimising risk ?????????????????????
???

• Assist Management in identifying, measuring and
  mitigating compliance related risk
  ?????????????????
• Partner with the business in monitoring level of
  risks to help achieve successful implementation
  of strategic initiatives ???????????,????????????

Assist management in managing risk to the
business ???????????

• Align with the business and help provide
  independent view and advice on the execution of
  strategy and on case-specific issues
  ??????,???????????????????????
• Understand strategy and business and apply this
  understanding in its risk-based approach to
  ensure that proportionate measures are taken to
  compliance issues and risk ?????????,????????????
  ????,???????????????????????

Provide advisory and objective support ?????????

• Provide guidance and support on issues related to
  laws and regulations ??????????????????
• Monitor the execution of initiatives and ensure
  all activities are compliant with relevant
  policies and procedures ?????????,????????????????

Implement business specific laws and regulations
????????????
4
Who is responsible for Compliance ?????????

• Business is firstly responsible?????????
• Compliance is intended for support
• ?????????????

5
Key Compliance Areas???????
I. Client Acceptance and Anti-Money Laundering
Policy ???????????(CAAML)

• Client Acceptance and Anti-Money Laundering
• ?????????
• Sanctions ??

• Suitability ??
• Appropriateness ??
• Record keeping ????

• Confidentiality ???
• Communication Marketing
• ?????
• Client Classification ????

II. Dealing with Customers ??????

• Conflicts of Interest ????
• Chinese Walls ???
• Market Abuse ????

III. Market Conduct ????

• Personal Account Dealing Policy ????????
• Gift Policy/ Bribery and Corruption
  ????/?????
• Whistleblowing
  ??
• When you need to Notify Compliance ???????

IV. Other Compliance topics ??????
6
I. Client Acceptance and Anti-Money Laundering
(CAAML) Policy ???????????

• KYC Know Your Customer ??????
• Client Acceptance/Due Diligence
  ?????/????
• Money Laundering Terrorist Financing
  ???????????
• Sanction
  ??

7
1
Identification
Initial RiskAssessment Client Acceptance And
Know Your Customer ???????????,??????
Exit? ???
??
????
Review Relationship
??
Verification
Client life Cycle ???????
?????
????
Risk Re-assessment

• AML RISK ?????
• Geography ??
• Industry ??
• Product ??

Risk Assessment
3
Transaction Surveillance
????
Periodical Risk Re-assessment (or change in
client profile / incidental) ???????(?????/??????
?)
Ongoing Risk Assessment???????? Anti-Money
Laundering CAAML/Sanctions???/??
2
8
Know Your Customer??????

• Customer Identification allows the bank to have
  confidence in the integrity of the persons with
  whom they transact business
• ????????????????????????
• Requires employees to obtain information
  identifying their customers ?????????????
• Requires employees to verify that customers are
  who they say they are ??????????????
• These responsibilities continue throughout the
  life of our relationship with a customer and
  apply to every transaction
• ????????????????????,???????

9
Money Laundering Terrorist Financing???????????
Money Laundering is the introduction of
illegally gained assets into the legal financial
system with the aim of concealing or disguising
their true origin. ?????????????????????,???????
??????????? Money Laundering generally takes
place in 3 steps ??????????? Placement ?? the
introduction of illegally gained assets into the
legal financial system with the aim of concealing
or disguising their true origin.
??????????????????,????????????????? Layering
?? the source of the illegally obtained funds is
obscured through a succession of transfers and
transactions to give them appearance of
legitimacy ???????????????????????,???????? Inte
gration ?? In order that those same funds can
eventually be made to re-appear as legitimate
income. ???????????????????
10
Examples of other sources for Money Laundering
Terrorist Financing????????????????

• Tax Fraud ????
• Counterfeiting Currency ??
• Kidnapping ??
• Extortion ????
• Illegal Gambling ????
• Environmental Crimes ????

• Drugs ??
• Prostitution ??
• Illegal Workers (Human trafficking) ????(????)
• Fraud ??
• Theft ??
• Smuggling goods and/or arms ????/??

11
Sanctions ??

• Two major financial markets, the EU and the US,
  apply economic sanctions in certain cases against
  particular countries to support their foreign
  policy objectives. ??????,????????????????????????
  ??????
• Violating EU or US sanction laws can put a banks
  customers at risk of incomplete transactions,
  frozen assets or criminal and civil penalties and
  expose our bank / employees to liability.????????
  ??????????????????????????????????????,???/??????
• Particular vigilance is needed when a transaction
  contains a so called CSI (Cuban Sudanese or
  Iranian) element.??????????CSI(????????)?,??????
• Vigilance is also needed when dealing with
  Myanmar.
• ?????????????

12
Transaction Surveillance ????

• Transaction monitoring
• ????
• Monitor post-transaction activity to detect
  unusual behaviour which requires further analysis
  (observation and investigation after transactions
  happen) more subjective
• ???????????????????????(???????????)???

• Transaction filtering
• ????
• Filter pre-transaction cross-border activity to
  comply with OFAC, EU and other Sanctions
  (immediate action to prevent transactions from
  being processed)
• ????????????????????????????(????????????)

13
II. Dealing with Customers??????

• Confidentiality ???
• Client Classification ????
• Suitability of Advice ??????
• Appropriateness ??
• Marketing Communication ????
• Record Keeping ????

14
Confidentiality ???
What information is confidential??????????

• All information related to a bank that has not
  been made public (including internal memos,
  policies, credit applications, employee and
  supplier data)
• ??????????????(???????????????????)
• All non-public information about existing and
  prospective clients ?????????????????

15
Confidentiality and common sense??????

• Be careful with confidential documents in public
  places (same applies to laptops)
• ?????????????(??????????)
• Be careful with conversations while in the
  presence of others (also on mobile phones)
• ??????(???????)?????????
• Clear your desk at the end of your working day of
  any sensitive documents
• ????????????????????
• Never share your user-id and password with others
• ???????????????

16
BIG BANG! ???!November 2007
2007?11? MiFID
MiFID

• MiFID Markets in Financial Instruments
  Directive
• Stringent NEW rules imposed on all Financial
  Institutions dealing with Customers and Markets
  in all EEA countries (EU Norway, Liechtenstein
  and Iceland)
• MiFID ????????
• -???EEA??(?????????????)?????????????????????
  ???

17
MiFID highest impact areas for ABN AMRO
MiFID??????????????

• Client Classification Determines the clients
  level of investment protection.
• ???????????????
• Best Execution Getting the client the best
  result which could
• be a combination of price/cost/speed of
  execution, etc
• ?????????????,?????????????????
• Marketing and Communication Must be clear, fair
  and not misleading.
• ??????????????????
• Appropriateness (Non advised Services) Making
  sure (by carefully
• recording) that the client understands the
  products and the related risks
• ???(??????)(??????)?????????????
• Suitability Advise the client what suits the
  clients best interests given their
• ??????????????????????,??
• Investment purpose ????
• Assets ??
• Income ??
• Risk appetite ????

18
MiFID Classification What types of clients do we
deal with? And why is it important to classify
them? MiFID??????????????????????????
Level of Protection ????
Individuals ??
Small Companies ???
Large Companies ???
Regulated Firms ????
Eligible counterparty ???????
Retail??
Professional??
Size and experience ?????
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Terminology ??
Advisory Services ????
Non Advised Services?????
Does each transaction meet the clients
objectives and risk profile? ?????????????????????
Does the client understand the risks of the
products being sold? ??????????????
Suitability???
Appropriateness???
20
Appropriateness Information required??? ?????

• Owed to Professional and Retail clients
  ??????????
• Assess ??
• Knowledge and experience ?????
• Can be assumed for professional clients but only
  in relation to those products/services or
  transactions for which we have classified them as
  professionals (unless you understand the risks).
• ??????????????,????????/?????????

21
What if it is not appropriate and the client
insists??????????????,????
Can you deal? ????????? Yes, so long as written
warning is provided ??,???????
22
Suitability ???

• Owed to all advisory clients ?????????

• What is advice? ???????
• Personal recommendation that is advice on
  investments (e.g. buy/sell/hold)
• ????????(?????????)
• Presented as suitable for the person or
  ??????,??
• Based on a consideration of the circumstances of
  the person ?????????????
• Where the client can reasonably assume it is a
  recommendation ??????????

23
Suitability of Advice ??????

• A bank may only give ???????
• - investment advice to a client or ????,??
• - effect a discretionary investment transaction
  ?????????
• when this is suitable given the clients needs
  and personal circumstances.
• ???????????????????
• Suitability must be assessed based on
  ?????????????
• the information disclosed by the client, and/or
  ???????,?/?
• client information the bank reasonably should
  have been aware of. ????????????
• In case of non advice for a client, no
  suitability check needs to take place.
• ?????????????,????????

24
Suitability of Advice Information from/to
client????????/???????

• Before the bank gives investment advice it must
  collect and retain sufficient
• information from the client on
  ??????????,??????????????????????
• - his / its investment experience and knowledge
  of products and risks attached ?????????????????
• - the investment objectives ????
• - the financial situation and personal
  circumstances ?????????
• - the clients risk appetite ???????
• Also the client must be able to take an informed
  decision and therefore must be given
• sufficient information on ?????????????,??,??????
  ????????
• - product characteristics including risk profile,
  pricing and costs
• ????,????????????
• All information provided must be fair, clear and
  not misleading.
• ???????????????????

25
Is this advice? ??????
We have a number of market protection structured
products. These can give the upside potential
without the downside risk. Shall I send some term
sheets through? ???????????????????????????,??????
???????????
Advice ??
Non advice ???
26
In view of your current portfolio and risk
appetite, I think the most appropriate
investment would be one of our market protection
structured products. These can give the upside
potential without the downside risk. In terms of
your current allocations I reckon that 50-60m
would effect the shift in frontier that you
want. ?????????????????,??????????????????????????
???????,????????????????,??5000-6000?????????????
Non advice ???
Advice ??
27
I remember our chat about airlines, a couple of
weeks ago and the upside following the slide in
oil. We think Blue Sky Airlines now have the
right strategy in place and you should give them
a go. ??????????????,????????????????????Blue
Sky?????????????,??????????
Non advice ???
Advice ??
28
Keep records where advice is given??????????

• The clients financial objectives must be
  recorded ???????????
• The advice must be recorded ?????????
• The reasons why you consider the advice meets the
  clients financial objective must be recorded
  ??????????????????????

Advisory Portfolio Management ??????????
Non Advised Services?????
Appropriateness???
Suitability???
29
III. Market Conduct ????

• Conflicts of Interest ????
• Chinese Walls ???
• Control Room ???
• Market Abuse ????

30
Conflicts of Interest ????

• For example??
• personal / bank interest ????/????
• bank interests / clients interest ????/????
• - between clients ???????
• Manage conflicts of interest properly ????????
• Be transparent and report internally ???,????
• Reallocate responsibilities ??????
• Inform client/ask consent if appropriate
  ????,????/???????

31
Chinese Walls ???

• What are Chinese Walls? ???????
• Barriers created to restrict or prevent movement
  of information within the bank, to help manage
  conflicts of interest and protect the
  confidentiality of client information.
• ????????????????????,????????,??????????
• What do they look like? ???
• physical ???
• organisational ???
• procedural ???
• operational ???

32
Chinese Walls Private vs. Public side
(Continued) ???????VS.????(?)
Chinese Wall
Private Side ????
Public Side ????
Global Clients ????
Global Markets Structured Finance ?????????
Global Markets Sales/ Trading ??????/??
Information Barrier????
Commercial Clients ????
Transaction Banking ??
Global Markets Research ??????
33
Chinese Walls (Continued)???(?)

• In addition, Chinese Walls allow ??,?????
• some defence against allegations of misconduct
  ???????
• maximisation of business opportunities across
  product lines by allowing us to perform many
  different roles at the same time
  ?????????????????????????????????
• Examples ??
• Corporate Finance advises listed company on
  divestment of subsidiary
• ???????????????????
• Acquisition Finance advises three different
  bidders
• ????????????????
• Credit Portfolio Management assesses debt
  capacity for fourth bidder
• ????????????????????
• Proprietary Trading in trading in the stocks of
  the listed company
• ??????????????????
• Private Clients in providing investment advice
  on the listed company
• ????????????????

34
Control Rooms ???

• A Control Rooms main functions ????????
• Maintaining global marketing and watch lists
• ???????????
• Maintaining global restricted trading lists
• ??????????
• Identifying potential conflicts of interest
• ?????????
• Clearing/recording Chinese Wall crossings and
  registering Insiders
• ??/?????????,???????
• Pre-clearance of equity and fixed-income research
• ??????????????
• Pre-clearance of certain transactions
• ????????

35
Market Abuse Market Manipulation????????

• Spreading false or misleading information about
  the market, or the price or value of an
  investmentE.g. spreading a rumour and false or
  misleading news through internet
• ??????????????????????????
• ????????????????
• Acting purely to influence the price of financial
  instruments
• E.g. manipulating the price at the closing of
  markets manipulating the price upward to
  show a higher portfolio value (usually
  around month-, quarter-, or year-end)
• ???????????????
• ?????????
• ???????,???????????(?????????????)
• Doing transactions that create the impression of
  greater supply and/or demand than exists in
  reality E.g. doing trades with no economic
  basis, undertaken simply to give the
  illusion of activity (manipulation of volume)
• ???????????????/??????
• ??????????????,??????????????(?????)

36
Market Abuse Insider dealing????????

• Inside information is information that is
  ??????
• Precise (about an event or circumstances that
  have occurred or can reasonably be expected to
  occur)
• ??(??????,????????????????????)
• Not generally available / Not obtainable by
  analysis or research
• ??????/???????????
• If it were made public, it would probably affect
  the price or value of the company / industry
  sector involved
• ??????,??????????/????????
• It includes information which could relate
  to?????????????
• Issuers of financial instruments ????????
• Transferable securities ?????
• Commodities or ????
• Client Orders ????

37
Market Abuse Insider dealing
(Continued)???????? (?)

• Anyone in the possession of inside information
  may not
• ?????????????
• Must not improperly pass the inside information
  on to someone else???????????????
• Buy or sell financial instruments of issuers for
  your own or a banks economic advantage
• ?????????????????????????
• Recommend or induce another person to do either
  of the above
• ????????????????

38
Other Compliance topics??????

• Personal Account Dealing Policy????????
• Gift Policy ????
• Bribery and Corruption ?????
• Whistleblowing ????

39
Personal Account Dealing Policy????????

• Why????
• Buying or selling securities while in the
  possession of confidential price sensitive
  information (inside information) is a criminal
  offence in most jurisdictions.?????,
  ??????????(????)???????????????
• Taking advantage of information that an employee
  gets in the performance of his or her duties in a
  bank for personal gain is unacceptable.
  ????????????????????
• The appearance of insider trading must also be
  avoided. ????????????

40

• Disclosure and transparency
• ????????
• All securities accounts of staff and their
  connected parties must be disclosed.
• ????????????????????
• A bank must be able to monitor transactions
  against submitted requests for approval.
• ???????????????????????

41

• Pre-Approval, Minimum Holding Period, Restricted
  Trading Lists
• ????,?????,??????
• Staff Members and connected parties must ask
  pre-approval from theirline-manager and / or
  Compliance departments.???????????????/??????????
  
• Transactions may only be reversed after 28 days
  have elapsed (28 day holding period).??28???????
  ?(28????)
• Mutual funds are not bound to the 28 day holding
  period but intraday trading (24 hours) is never
  permitted
• ??????28???????,?????(24??)???
• There can be trading done in securities on
  restricted trading lists ????????????????????

42
Gift Policy ????

• Acceptance of gifts ????
• Gifts or legacies must not be accepted
  fromcustomers or suppliers.????????????????????
• Excessive or abnormal entertainment must also be
  viewed in this light.?????????????
• If a gift can not be refused or returned, it may
  be
• accepted provided that it is ???????????,????????
  ??
• not in the form of cash?????
• not given in the expectation of a payback
  ????????
• of nominal value only??????

43
Gift Policy ???? (Continued)(?)

• Presentation of gifts ????
• Gifts to customers, suppliers, government
  officialsor intermediaries must not be presented
  as a way of gaining economic or political
  advantage.
• ?????????????????????????????????????
• As an exception, gifts of nominal value may be
  presented
• ?????????????????
• as a courtesy ????
• for promotional purposes ????
• special occasions where a Bank gift may be
  appropriate ????,???????????????

44
Bribery ??

• Bribery is defined as ??????
• offering ??
• suggesting ????
• paying ??????
• or authorising ???????????
• a payment to someone for their or anothers
  personal gain with the intention either to
  motivate active or passive deviation from a duty
  or to secure the performance of a duty.
  ?????????????????????????????,????????????????????
  ?

45
Corruption ??

• Effects of Corruption on Business
• ??????????
• Causes damage to reputation, which, in turn,
  causes loss of confidence in the market
  ??????,??????????
• Increases uncertainty in business ???????
• Increases costs ????
• Hampers international trade ??????
• Reduces investment????

46
Whistleblowing Policy ????

• What this policy does? ???????
• Ensure that all staff can whistleblow (even
  anonymously), on (suspected) criminal or
  unethical conduct ?????????(???????)(??)?????????
  ??
• How? ?????
• by encouraging staff to make disclosure of
  criminal or unethical conduct ????????????????
• by providing the means for staff to make those
  disclosures (private email addresses and phone
  numbers) ??????????(???????????)
• by ensuring that disclosures will be treated
  with discretion and utmost confidentiality
  ????????????????
• by explicitly protecting the individual who
  makes a disclosure in good faith ?????????????

47
Employees should notify Compliance when
they?????,?????????

• Are connected with a transaction where you have
  reasonable grounds to suspect that the
  counterparty and/or client is engaged in insider
  dealing or price manipulation. ?????,????,????????
  ???/???????????????
• Suspect transactions to involve money laundering
  and/or financial crime???????/????????
• Suspect incorrect pricing of positions e.g.
  mismarking. ?????????????
• Suspect false or misleading valuations to
  customers, etc. ??????????????????
• Are aware of trading limits being deliberately
  exceeded. ?????????????
• Are aware of activities intended to mislead the
  Bank, our customers, or the regulators.
  ????????????????????
• Find your position conflicted or are faced with a
  potential conflict of interest.
  ?????????????????????
• See any gift, or proposed gift, is given to a
  government or regulatory official or employee who
  is either directly or indirectly associated with
  the Banks business. ?????????????????????????????
  ???????????

48
Employees are expected to notify Compliance when
they (continued)?????,?????????(?)

• See a significant complaint made by a client and
  it has not been dealt with to the satisfaction of
  the client. ???????????????????
• Are in receipt of inside information which is not
  in accordance with the Banks policies and
  procedures ?????????????????
• Are aware of a breach of the Personal Account
  Dealing rules. ????????????????