Federal Reserve Board issues enforcement actions with First Interstate Bank and United Texas Bank - Have we learned anything yet?

The cease-and-desist order against United Texas Bank and the civil money penalties imposed on First Interstate Bank reflect a growing trend of banks facing serious consequences for deficient governance, risk management, and compliance frameworks.

Have we not learned from prior consent orders? In both instances, supervisory authorities uncovered systemic issues, from violations of anti-money laundering (AML) and Bank Secrecy Act (BSA) regulations to flood insurance requirements. These enforcement actions serve as a stark reminder that regulatory compliance and strong oversight mechanisms are not optional. If we think investing in compliance officers and adequate resources is costly, let's consider the far greater expense of non-compliance.??

These enforcement actions underline the need for banks to prioritize regulatory compliance and build strong oversight mechanisms. Sounds familiar right??

Lessons Learned:

1. Corporate Governance and Board Oversight: Effective governance requires that a bank’s board of directors take an active role in overseeing management, ensuring compliance with relevant laws, and mitigating risks. The board should have clear policies and procedures for identifying, monitoring, and escalating compliance issues.

2. Risk Management and Compliance Programs: Deficiencies in areas like AML, BSA, and flood insurance regulations show how important it is to have a robust risk management framework. Banks must perform comprehensive risk assessments, ensure independent testing, and conduct regular evaluations of their compliance programs.

3. Customer Due Diligence and Monitoring: Both banks faced challenges with customer due diligence and monitoring transactions. Instituting risk-based customer identification procedures and monitoring customer transactions for suspicious activities are vital for effective oversight and regulatory compliance.

4. Qualified Compliance Teams: The role of compliance officers is critical. Ensuring that compliance professionals have adequate resources, authority, and independence to perform their duties is essential to maintaining an effective program.

I am going to say this LOUD AND CLEAR??. "Compliance officers are essential to managing an organization’s regulatory framework by identifying, mitigating, and managing risks. Their effectiveness depends on having the necessary resources, authority, and independence. This includes access to advanced technology, adequate staffing, and ongoing training. Compliance officers must have the authority to enforce policies, direct access to the board, and decision-making power. Independence from business influence ensures their objectivity, with clear reporting structures and autonomy in investigations. Integrating compliance into the business strategy and investing in a well-resourced compliance team helps avoid costly non-compliance, safeguarding the organization’s long-term sustainability and reputation." DING! DING! DING! ???

Building Effective Oversight:

1. Board Accountability: The board must regularly review and approve comprehensive compliance plans, ensuring proper resource allocation and staffing. They must actively engage in overseeing management’s adherence to compliance programs and require granular, detailed reports on progress and risk areas.

2. Independent Testing and Auditing: Implement independent testing mechanisms that regularly assess the effectiveness of the bank’s compliance program. This ensures that any gaps are identified and addressed in a timely manner, preventing potential regulatory violations.

3. Continuous Training: Provide ongoing training programs to staff, especially those in key compliance roles, to keep them informed of evolving regulations, such as AML/BSA, OFAC, and flood insurance requirements.

4. Technology-Driven Solutions: Leverage technology to enhance transaction monitoring, customer due diligence, and risk management. Automated systems can help flag suspicious transactions and ensure compliance with various regulatory frameworks.

5. Regular Reviews and Updates: Banks must continuously reassess their compliance programs, governance structures, and risk assessments. Regulatory requirements evolve, and so should the bank’s policies and internal controls to maintain compliance and mitigate risks.

By implementing these strategies, banks can strengthen oversight, minimize regulatory risk, and foster a culture of compliance that aligns with both federal and state laws.

Disclaimer: The information provided above consists of recommendations and opinions only. Please consult with your legal counsel for advice on any legal matters.

Stay compliant and stay ahead, folks! ???

Best,

DG