Financial Regulatory Compliance:

Global Leading Practices and Reputational Risk

Vladimir Berezansky

EY FIDS Moscow

26 October 2015

Page 2

KYC & On-Boarding: Enhanced Risks

Financial

regulators in all

jurisdictions are

demanding

enhanced levels of

compliance,

transparency and

responsiveness

Tendency for

thresholds and

metrics defining

minimally acceptable

Compliance to

ratchet upward

continuously

Complexity and

redundancy of

KYC, on-boarding

procedures

escalate

operational costs,

time and energy

Responding to these

pressures, some

banks take a

maximalist approach

toward requiring

supporting

documentation – i.e.,

padding the KYC files

New measures and requirements

imposed by financial regulators that

were designed to reduce KYC / on-

boarding risks for licensed entities

have had the opposite effect:

Exposure to regulatory / reputational

risk has never been higher.

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Page 3

KYC: Financial Regulators Tighten the Screws

EU Fourth AML Directive

Reflects and enforces the trend

of increasingly invasive regulatory

oversight and control:

• Requires more detailed

corporate identification

documentation;

• Applies to all EU legal entities

(including companies) –

meaning,

NO GRANDFATHERING

FinCEN

Is proposing changes to BSA

«to clarify and strengthen

customer due diligence

requirements» for FIs, including:

• Explicit DD requirements –

i.e., not only «What?» but

«How?»

• New regulatory requirement to

identify the beneficial owner of

corporate (legal entity)

customers

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Page 4

Pillars of Robust Financial Regulatory Compliance

Corporate

Governance

Global Control

Room/Information

Barriers

Three Layers

of Defence

Training:

Induction,

Required,

Periodic

Surveillance

and

Monitoring

Culture of

Compliance/

Tone from

the Top

Anti-

Bribery/Anti-

Corruption

Controls

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Page 5

Full-Service Bank: Corporate Governance

Third-Party Due

Diligence (Vendor &

Supplier Vetting) Training

Systems

Monitoring &

Surveillance

Compensation Committee

Internal Audit

BOARD OF DIRECTORS

Corporate Secretariat

Conflict Clearance

Committee

CEO

CRO HR CFO COO General

Counsel CCO CIO

Risk Management

HR Legal Operations Finance Compliance IT

Board-

Level

‘C-level’

Executive

Board

Cross

(Interdepartmental)

functions

Operations

‘Back

Office’

Investor Relations Marketing & Communications

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Page 6

Full-Service Bank: Segregated Front Office Activities

Board

CEO

Retail Leasing Investment

Banking

Wealth

Management Corporate

Private

Banking

Trade

Finance

Custody/

Depositary

Asset

Management

Equities Sales &

Trade

FICC Sales &

Trade

Proprietary

Trading Desk

Corporate

Finance

Structured

Products

Capital Markets:

Debt & Equity

Bank 2 Bank

Research

Credit

Risk/Research

‘Public’ Side:

no PMSI

‘Private’ Side:

PMSI

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Page 7

International

► Financial Action Task Force – FATF

Recommendations

► Wolfsberg Group AML Principles &

Questionnaire

► United Nations Convention against

Corruption (UNCAC)

Regional

► EC – Fourth Anti-money Laundering

Directive

► Markets in Financial Instruments Directive –

MiFID

► European Securities and Markets Authority –

ESMA

► European Market Infrastructure Regulation –

EMIR

Global Leading Practices: Sources of Authority & Guidance (1)

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Page 8

Global Leading Practices: Sources of Authority & Guidance (2)

National/Domestic

• Regulatory Authorities – e.g., SEC, FCA, PRA, FINMA,

(former FSFM) and central banks

(Fed, BoE, ECB, RCB)

• Self-Regulatory

Organisations – e.g., ABA, BBA

SBA, ARB, NAUFOR

• «Self-Accrediting»

Collegial Bodies – ACAMS,

ICA, ECA

Leading Practices

Various sources of

authority/ voluntarily

adopted & implemented

May be implemented as a

tool (point of reference) to

mitigate risk

May be adopted as a

distinguishing factor /

hallmark

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Page 9

► Bank Secrecy Act (1970)

► Foreign Corrupt Practices Act

(1977)

► Patriot Act (2001)

► Sarbanes-Oxley Act (SOX)

(2002)

► Foreign Account Tax

Compliance Act (FATCA)

(2010)

► Dodd-Frank Act (2010)

Highly Influential Foreign Regulatory Regime: USA

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Page 10

Highly Influential Foreign Regulatory Regime: UK

► Terrorism Act (2000)

► Proceeds of Crime Act (2002)

► Money Laundering Regulations

(2007)

► Bribery Act (2010)

► FCA Handbook, PRA Handbook,

PRA Rulebook (2013)

► Counter-Terrorism and Security Act

(CTSA) (2015)

► AML Guidance issued by the Joint

Money Laundering Steering Group

(JMLSG)

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Page 11

Russia’s Financial Regulatory Regime (1)

№ of

document

Type of

regulation

Full name

Date

86-FZ Federal Law On the Central Bank of the Russian

Federation (Bank of Russia)

10 July 2002

395-1 Federal Law On Banks and Banking Activity 02 December 1990

39-FZ Federal Law On the Securities Market 22 April 1996

181-F Federal Law On Using State-issued Securities of

the Russian Federation for

Increasing Bank Capitalization

18 July 2009

115-FZ Federal Law On Counteracting the Legalisation

(Laundering) of Income Generated

from Criminal Activity and the

Financing of Terrorism

07 August 2001

273-FZ Federal Law On Counteracting Corruption 25 December 2008

224-FZ Federal Law On Counteracting the Improper Use

of Inside Information and Market

Manipulation

27 July 2010

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Page 12

Russia’s Financial Regulatory Regime (2)

№

Type of

regulation

Full name

Date

№262

Russian Central

Bank Regulation

On Identifying Clients and Beneficiaries of Credit-issuing

Organizations in order to Counteract the Legalization

(Laundering) of Income Generated from Criminal Activity and the

Financing of Terrorism

19 August 2004

№242 Russian Central

Bank Regulation

On Organizing the Internal Control Function at Credit-issuing

Organizations and in Banking Groups

16 December 2003

№375-P

Russian Central

Bank Regulation

On Requirements of the Rules for the Internal Control Function

at Credit-issuing Organizations in order to Counteract the

Legalization (Laundering) of Income Generated from Criminal

Activity and the Financing of Terrorism

02 March 2012

№375-P Appendix to

Regulation of the

Bank of Russia

Indicators (Red Flags) of Suspicious Transactions

02 March 2012.

№321-P

Russian Central

Bank Regulation

• On Procedures for Credit-issuing Organizations to Use in

Reporting to Regulatory Authorities on Information Designated

in the Federal Law

• On Counteracting the Legalization (Laundering) of Income

Generated from Criminal Activity and the Financing of

Terrorism

29 August 2008

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Page 13

► USD 25 billion — Five banks 2012, for alleged foreclosure

processing abuses

► USD 13 billion — JPMorgan Chase 2013, for claims over

residential-backed mortgage securities

► USD 9.3 billion — Thirteen banks 2013, for alleged

foreclosure abuses

► USD 9 billion – BNP Paribas 2014, sanctioned countries list

violations

US Banking Regulatory Fines

► [USD 8.5 billion — Bank of America – June 2011, settlement reached with group of

mortgage bond holders]

► USD 2.6 billion — Credit Suisse AG – May 2014, for conspiracy to aid tax evasion

► USD 1.9 billion — HSBC 2012, for deficiencies in anti-money laundering controls

(largest BSA fine ever)

► USD 1.5 billion — UBS 2012, for manipulating interbank lending rates including LIBOR

► USD 1.4 billion — 10 Wall Street firms 2003, for conflicts of interest between Research

and IB functions

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Page 14

► GBP37.7 mln. Barclay’s Sep 2014, for insufficiently proper segregation of client funds

► GBP28 mln. Lloyd’s Dec 2013, for ‘serious failings’ in systems & controls governing

financial incentives to sales staff

► GBP205 mln. Rabobank Oct 2013, for misconduct relating to LIBOR

UK Banking Regulatory Fines

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Page 15

Conclusion

To create an operational environment that anticipates

and identifies likely regulatory enhancements;

To position itself to respond rapidly and cost-efficiently

in order to implement change driven by the regulator

and/or the market;

To reap the tangible benefits of developing and

maintaining a reputation among regulators and in the

market for robust compliance.

1

2

3

In a rapidly changing financial regulatory environment,

global leading practices position a bank have:

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► Leader, Compliance Practice, Assurance, Fraud Investigation & Dispute Services (FIDS) Group

► Joined EY in 2013, based in EY CIS Moscow office

► Education/Background – Bachelor’s (Linguistics), Columbia University (New York); Juris Doctorate (JD), international private law, Washington College of Law, The American University (Washington, D.C.),

► Federal District (Washington, D.C.) Bar (license)

► Russian broker-dealer license (1,0 Certification)

► Regular speaker at conferences, graduate (business & law) schools; meetings with financial regulators

► Languages spoken – English, Russian, French & German

► Nearly twenty years work experience in Russia / CIS and Baltic Republics, Cyprus, Switzerland and London financial markets

► Compliance practice includes:

► review & analysis of Russian/CIS banking, financial and corporate Compliance infrastructures;

► due diligence on Russian/CIS cross-border holding structures;

► gap analysis and similar (e.g., dashboard) assessments of internal policies & protocols as measured by global best practices, US / UK regulatory standards, and local regulatory requirements;

► review adequacy & effectiveness of corporate governance mechanisms (Board structure, Board committees and Director / Officer authorisations, internal policies & protocols, etc.)

► prepare Russian/CIS entities for scrutiny by capital markets (ratings agencies, potential counterparties, investment and/or acquisition targets) and/or private investment entities (funds, family offices)

► Prepare banking & financial clients for relevant Anglo-American & EU regulatory regime compliance, including UK Bribery Act, FCPA, Dodd-Frank / EMIR and FATCA

► Extensive network of contacts & working relationships with regulators, SROs, banks and regulated securities market entities in Russia / CIS, Baltic Republics, Switzerland, Cyprus, London, New York and Washington, D.C.

Place

image

here.

Refer to

guidelines

Vladimir Berezansky Leader, Compliance Practice Assurance | FIDS

Tel.: +7 495 287 6537 Cel: +7 985 773 4176 Email: vladimir.berezansky@ru.ey.com

CV - Vladimir Berezansky

Background Professional experience

Skills

► Develop and implement Western-quality Compliance programs primarily for Russian / CIS banks, investment firms and affiliated group / holding structures

► Comprehensive due diligence – AML / KYC, regulatory and reputational risk – and corporate governance analysis, including restructuring recommendations

► Develop confidential dossiers on key Russian / CIS officers and directors, including PEPs and senior managers of state-owned enterprises