BSP tightens up on compliance system of banks

The Bangko Sentral ng Pilipinas (BSP) is tightening up on the compliance programs of the banking industry by making the boards of directors responsible for their banks’ compliance with banking rules and regulations.

The BSP is issuing a new memorandum circular requiring banks to align their compliance programs with the provisions of the Basle Convention.

BSP Acting Governor Alberto V. Reyes explained that under existing rules, the compliance officers and the entire compliance departments of banks are not completely independent since they all report to the bank management.

"What we want to do is to ensure that compliance officers are independent, reporting directly to the board of directors," Reyes said. "The board of directors, in turn, would be responsible for ensuring the effectiveness and independence of the compliance department."

According to Reyes, the oversight function of the board on the banks’ compliance groups has been stressed by the Basle Convention to ensure that these groups remain independent of the bank management.

Reyes said that in major jurisdictions, bank compliance officers were among the most powerful officials in any bank, vested with the power to recommend the removal of key executives as well imposing as penalties for violations of banking rules and regulations.

"They’re like the ombudsman within the banking institution, they cannot be subjugated by the bank management and they have the power to keep the bank in line," he said. "As the policy-making body of the institution, the board of directors will now be responsible for setting up an effective compliance system."

Reyes said the policy would be applicable to the entire banking system from universal and commercial banks down to the smallest cooperative rural banks.

On the other hand, Reyes said banks are also allowed to outsource their compliance departments if they feel this would be more effective than having an in-house compliance department.

"The only requirement is independence," Reyes said. "If they oursource it, the same rules would apply that applies to external auditors."