The compliance function of a bank, brokerage firm or other financial institution is designed to ensure compliance with all applicable rules, laws and regulations, whether local or international. The traditional compliance model was designed as a law enforcement tool with limited focus on identifying and managing actual risks.

Today, however, the tasks of compliance employees include monitoring bank activities and identifying and assessing risk areas. The latter may include testing and evaluating the adequacy of the bank's policies and security and risk assessment tools. The compliance unit can also implement solutions to address identified risks, design compliance programs for new rules and regulations, and oversee employee training programs.

Potential risks
Compliance rules, laws and standards typically cover matters connected to the observance of proper standards of market conduct and fair treatment of customers. Depending on the scope of the business, bank compliance duties may range from preventing conflicts of interest, money laundering and tax evasion, to monitoring trading activity, to ensuring compliance with applicable regulations. Compliance requirements for most financial institutions have increased significantly since the 2008 financial crisis, and new compliance topics continue to emerge - such as conduct risk, risk culture, Anti-Money Laundering and next-generation Bank Secrecy Act (AML/BSA) risk and third- and fourth-party risk, among others.

The compliance function must extend its focus beyond the financial institution and its employees. It is also responsible for ensuring that the bank's clients don't use the bank for illegal activities, such as tax evasion, money laundering or funding terrorism. If there is any suspicion of illegal activity, the compliance unit must ensure that the bank takes the proper action, otherwise it can be held liable.

While banks view compliance requirements as a way of keeping their reputations clean, non-compliance may lead to large monetary fines and regulatory and legal sanctions, as well as loss of reputation. 'Compliance risk' is defined as a bank's risk of suffering regulatory or legal sanctions, loss of reputation or material financial loss due to a failure to comply with the regulations, laws, rules, relevant self-regulatory standards and codes of conduct applicable to certain business activities.