Common Entity Practices for the Banking Industry

Lauren Mcmenemy
The last decade has seen something of a globally accepted approach form when it comes to entity practices in the banking industry. The global financial crisis of 2008 marked the end of an era of seemingly boundless freedom (though the reality was far from that!); instead, banks and other financial services industry players have faced regulatory crackdowns in how they both operate and structure themselves. Today, financial services organizations are facing increased calls for transparency, a demand for sharing of information between institutions and governments to crack down on wealth secrecy, and robust Know Your Customer (KYC) requirements meaning banks must really know their customers inside and out.

How do global regulations impact entity practices for the banking industry?

Entity practices in the banking industry, then, are evolving in line with global regulation. Banks have traditionally needed to pay more attention to risk than other types of corporations, and governance and entity management was, therefore, much more robust to begin with. Today, the three main factors that shape banks ' compliance with a framework of laws and taxes; internal governance oversight; external regulatory pressures ' are placing more scrutiny on banking boards than ever before. It's worth recapping some of the global economic movements that are impacting entity practices in the banking industry. Many of these movements impact the wider business world, but have a particularly strong effect on banking entity practices.

Basel III

A set of international banking regulations developed by the Bank for International Settlements, the Basel regulations aim to promote stability in the international financial system by discouraging banks from taking on excess risk. It says that banks 'must hold more capital against their assets, thereby decreasing the size of their balance sheets and their ability to leverage themselves,' according to Investopedia. This has an immediate and obvious impact on entity practices in the banking industry, as it means close attention must be paid to both risk management and balance sheets.

Base Erosion and Profit Shifting (BEPS)

The Organisation for Economic Co-operation and Development's (OECD) BEPS project is another device designed to impact how organizations both structure themselves and deal with balance sheets across a structure. When initially floated, the OECD did recognize that there were some problems with how BEPS could apply to banks, but it's important for the banking industry to still pay heed to the project and its ultimate impact on the world's markets, ensuring strong and robust entity practices are part of everyday life.

Foreign Account Tax Compliance Act (FATCA)

The FATCA was passed as part of the US Hiring Incentives to Restore Employment (HIRE) Act in 2010, and it generally requires that foreign financial institutions and certain other non-financial foreign entities report on the foreign assets help by any US account holders, or be subject to withholding on withholdable payments. It also requires US persons to report their foreign financial accounts and foreign assets. FATCA means that banks must pay close attention to how they keep and monitor customer records, as those records must be shared with US governmental institutions.

Common Reporting Standard (CRS)

The CRS is another global movement to help fight tax evasion and protect the integrity of tax systems. Under the CRS, banks and financial institutions are required to determine where customers are 'tax resident'; if the customer is a tax resident outside the country or jurisdiction in which they are a customer, the bank may be required to share account information with the appropriate tax authority. It's another reason why entity data and customer recordkeeping must be robust and secure as part of entity practices in the banking industry.

Know Your Customer (KYC) and Anti-Money Laundering (AML)

Financial crime is not a new concern for the banking industry, and both KYC and AML regulations formalize practices that many financial institutions were already following. However, both of these processes are important to follow, or the bank risks huge fines ' Dutch bank ING was fined $900 million for failing to meet Dutch AML compliance in 2018. It's incredibly important for entity practices in the banking industry to ensure the basics of understanding the ultimate beneficial owner of an account, and the provenance of the money and assets that move through the account, are in place and strong.

Should a banking group centralize entity practices?

With those global regulatory movements in mind, there are two different arguments for entity practices in the banking industry. One says that a decentralized approach, where every entity handles its own compliance and governance according to what it thinks is best for the local jurisdiction, is the quickest path to efficiency in entity management. The other prefers a centralized approach, where the parent or headquarters has a central view of all entity management practices across the structure, regardless of where an entity is domiciled, with governance and compliance policies set at the top and cascaded down for local implementation. There is no right or wrong way when it comes to entity practices for the banking industry, but with the increasingly global push for transparency across financial services, more and more financial groups are moving toward a centralized approach ' with the appropriate levels of distance as required by regulation, of course. That distance and ensuring the appropriate levels of checks and balances are set within a banking group structure are of paramount importance. Too much control exerted by parents over subsidiaries was one of the issues that arose during Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, with the commission's final recommendations finding that the primary responsibility for misconduct lay with both the entities and their boards and senior management. So, when it comes to entity practices in the banking industry ' and whether you opt for a centralized or decentralized approach to entity management ' the main thing is to ensure robust entity management practices are in place, and that the corporate record is kept up to date and ready for regulatory scrutiny at any moment.

Using technology to support robust entity management practices for the banking industry

No matter how a banking group structures itself, it's imperative that each entity within that structure has strong and robust entity management, compliance and governance processes. Banks today could be asked to supply details to regulators at any minute, and failure to produce accurate and up-to-date entity information can result in troubled times ' fines, reputational damage or perhaps even sanctions for directors, all of which can have an impact on shareholder value. To ease the burden of compliance and ensure that entity data is kept up to date, banks and other financial services institutions would do well to consider the impact that adopting entity management software could have on their legal operations. Entity management software ' such as Diligent Entities ' helps organizations to centralize, manage and effectively structure their corporate record to improve entity governance. This, in turn, helps to better ensure compliance, mitigate risk and improve decision making through an integrated governance solution. Diligent Entities can help banks to store entity information and documents in a highly secure format to create a single source of truth for all governance and compliance reporting. This entity data can then be pulled into organizational charts to help highlight legal risks in banking structures, such as where entities may share directors, but local regulations demand a separation from the parent company. Diligent Entities also seamlessly integrates with the board portal, Diligent Boards, and a secure file-sharing system to create the Governance Cloud, an all-in-one compliance and governance ecosystem that helps to streamline operations and ease the burden of compliance. Get in touch and request a demo to see how Diligent's Governance Cloud can help banks to surface the right information to the right people at the right time, and ensure your corner of the banking industry can comply efficiently with both global and local regulation.
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Lauren McMenemy

Experienced journalist Lauren McMenemy has been writing about compliance and governance for several years, and has covered finance, professional services, healthcare, technology, energy and entertainment.