Business Decisions that undermine the Compliance Culture – Part 2

When leading a financial services entity, in particular within the company service provision, one needs to be aware of the consequences of business decisions that could undermine the entity’s business policies, systems and the overall compliance culture. In this 5-part series of articles, I will analyse 5 business decisions, through the legislative references such decisions could fall foul of, the impact on the organisation these decisions could have, and attempt to suggest a course of action. 

Compliance/AML Division bonus scheme linked to the attainment of new business

The problematic decision to be analysed in this article is that which causes the Compliance/AML divisions to be seen as business enablers, having their bonus scheme linked to new business KPIs.

Legislative/Competent Authorities’ references

The Company Services Providers Rule Book, issued by the Malta Financial Services Authority on the 15^th March 2021, has expressed itself very clearly on this particular issue, specifically about the conflict of having AML/Compliance staff or effectively the 2^nd line of defence in fighting ML/FT within a firm, in being client-facing and having their remuneration compromise their objectivity. ‘The relevant persons involved in the compliance function shall not be involved in the performance of services or activities which they monitor and shall be sufficiently independent from the client onboarding process; and the method of determining the remuneration of the relevant persons involved in the compliance function shall not compromise their objectivity and shall not be likely to do so’.[1]

Main impact

Undoubtedly, it is important that the AML/Compliance division attains a reasonable level of commercial pragmatism[2] and that the procedures and processes of this division do not hinder the commercial aspect but compliments it by ensuring that new business onboarded is in line with entity’s Board risk appetite and done in accordance to prevailing AML rules and regulations. However, any current set-up with the AML/Compliance division seen as business enablers with their bonus scheme tied to new business, impinges directly on the independence and objectivity of the division and seriously undermines the compliance culture any Board needs to focus on building.   

In addition, maintaining the current status breaches the CSP Rule Book and the MFSA may, ‘by virtue of the authority granted to it, impose administrative penalties, without recourse to a court of law, up to a maximum of €50,000’. [3]

From an MLRO standpoint, having the 2^nd line of defence and members of this team with prejudiced independence and objectivity could result in personal sanctions, both administrative and criminal, especially if due to the division’s dereliction of duty towards AML and in favour of on-boarding business, results in the on-boarding of non-reputable, fraudulent, criminal business or sanctioned PEPs.  This will cascade on the firm, with reputational, legal and operational damage.

Course of action

It is recommended that the bonus scheme for the staff members of the AML/Compliance division is immediately amended. Any references to sales or onboarding of new business are removed.

Clear job descriptions and roles are drawn up removing any conflicting references that imparts from the independence and objectivity needed in such compliance roles and any KPIs linked to new business is replaced by compliance metrics. One would suggest to involve HR in revising any contractual references with conflicting duties and AML staff bonuses switched to a pre-determined amount or percentage of salary, linked to updated KPIs such as:

• Number of internal compliance issues open;
• Post-authorities’ and regulatory inspections, the number of compliance-issues identified;
• Turnaround time in providing feedback on onboarding as long as they are not part of the decision to onboard;
• Keeping abreast with legislative rules and regulations;
• Self-development in the compliance/AML field.

By putting the above in place, the Board will be also progressing towards a more balanced/compliance culture.

About the Author

This article has been authored by Jean-Claude Cardona, CSB Group Operations & Finance Director. Contact us on https://www.csbgroup.com/contact-us/ for more information.

[1] Company Service Provider Rule Book, MFSA, March 2021, R3 8.4.

[2] ICA Manual, Module 5.

[3] Company Service Provider Rule Book, MFSA, March 2021, R5 2.2.