"Five years ago this month, the regulatory environment for financial institutions was transformed virtually overnight," observes Sandy Jaffee, CEO of Fortent, a specialist in anti-money laundering, know your customer and fraud detection technology. "The passage of the PATRIOT Act in October of 2001 brought a whole new level of regulatory oversight to banks and other segments of the financial industry."

Signed by President Bush on October 26, 2001, the USA PATRIOT Act has "elevated compliance to a top-level issue for boards of directors," says Jaffee. "Directors and financial executives are increasingly concerned about reputational risk and have created demand in the market for new ways to solve their compliance problems."

The USA PATRIOT Act - U niting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 - has spurred these key developments in the financial services industry, says Jaffee:

  • New burden on smaller banks - Large banks, often the first focus of regulatory activity, have been able to develop compliance systems to meet the relatively measured pace of regulatory change since the Bank Secrecy Act of 1970. But the PATRIOT Act has brought a new and urgent spotlight on midsize and smaller banks as money launderers have shifted their schemes to financial institutions with the least internal enforcement capacity. Examiners are now applying the same standard of "zero tolerance" in detection and reporting requirements to both regional and global institutions. New to such intense regulatory oversight, smaller banks are facing huge implementation and cost challenges to put adequate compliance programs in place.
  • Scrutiny beyond banks - The segments of the financial industry that fall outside the scope of banking regulators are also expanding their enforcement efforts to thwart money launderers seeking unregulated businesses. The PATRIOT Act expanded compliance requirements, previously mandated only for banks, to the broker/dealer community, insurance companies, mutual funds, and other financial entities. This year, in its first-ever enforcement action under the PATRIOT Act, the Securities and Exchange Commission sanctioned a broker-dealer for violating customer identification requirements.
  • Demand for expertise - Changes in legislation as well as the specific needs for technology to address these compliance issues have created a demand for multi-dimensional professionals who combine expertise in banking, technology, and compliance. Banks are recruiting experts attuned to regulatory expectations, even hiring former policy-makers and examiners as key members of their compliance staff. But organizations have found such people in short supply, leading to stiff competition for those workers.
  • Demand for efficient technology - Instead of installing compliance technology that slows operations, businesses are demanding that compliance systems be integrated into existing business processes to improve workflow and productivity.
  • Trend toward integrated regulatory standards - The five biggest federal regulatory agencies are working more closely than ever to create common compliance standards for the financial businesses they regulate.
  • Higher costs of noncompliance - The proven consequences of noncompliance - fines of up to $80 million, the personal liability of board directors and top executives in public companies, stiff penalties curbing business expansion, millions of dollars in remediation costs and reputational damage - are forcing banks to rethink what compliance will cost.

"What the changes of the past five years have shown are the depth and breadth to which the PATRIOT Act has affected every size financial institution," observes Jaffee. "Once seen as a routine, check-the-box issue, compliance is now regarded as essential to protecting reputational risk."

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