Failure to Comply 2017: Worth the Risk?
Posted by Steve Gibbs, CUCE, BSACS, AVP Shared Compliance, Credit Union Resources, Inc on 6/7/2017

Although there seems to be an emerging mind-set that the government is “backing off” on regulation, examiners continue to examine and laws/regulations remain in place.  Documents of Resolution, Cease and Desist Orders as well as other regulatory orders are still being issued.  We, as credit union professionals, are responsible to our members, boards, staff, co-workers, regulators, state/federal governments and numerous other associated entities.  “Compliance” with policies, procedures, codes, rules, laws, and statutes has not disappeared – and remains significantly volatile if ignored or neglected.    

Reputation Risk

Failure to show compliance with federal or state regulations can easily become public knowledge and a major risk factor for credit unions.  As with Savings and Loans in the 1980’s, hints that regulatory issues might result in major losses could easily cause the public doubt the ability of an institution to continue operating and cause a “run”, emptying accounts and leaving a lasting memory of failure with members and the general public.  From a Bank Secrecy Act/OFAC perspective, non-compliance may leave a perception of poor management and a feeling that the institution is not contributing to maintaining national security in monitoring both membership and deposits.  In a post-9/11 world, media coverage tying an institution to terrorist groups or acts will take years of expensive marketing and public relations work to undo the damage (particularly if connects to groups such as Al-Qaeda/Isis or situations that result in harm to innocent individuals).  Another perspective of reputation involves consumer laws and regulations.  Once again, media (such as television and newspapers) can be very detrimental to the public image of an institution that fails to comply with or ignores consumer-related rules/statutes, particularly in cases where the individuals involved are within a protected class or are in a position to attract public sentiment (ex., illness, military service).   

Regulatory Risk

Obviously, the onslaught of new compliance rules and regulations has tipped the scale of examination reporting.  What was once a small section of the examination, now takes up a significant portion of the report.   As a primary example, the Bank Secrecy Act (BSA) section of the report has grown in size and importance since 2001.  When joined with Anti-Money Laundering (AML) and Office of Foreign Assets Control (OFAC) regulations they become a “triple threat”.   If there are problems with BSA, AML, OFAC or any combination of those items, in most cases the examination report will hold an overall negative tone. 

With regard to examinations, failure to comply may result in various responses from regulators.  Initially, the credit union may be given a ninety-day period to correct regulatory infractions.  If this isn’t done within the allotted time period, regulators may draft a formal Memorandum of Understanding, forcing the credit union to comply within a specified period.  If the credit union still fails to make corrections, then examiners/regulators could opt for more severe repercussions such as a Cease and Desist Order or even Conservatorship is there is a determination that operations need close and constant scrutiny. 

Legal Risk

Not only does failure to maintain compliance affect the institution from a regulatory position, it can evoke legal issues in many cases. Class action lawsuits have been borne from neglect of/habitual mistakes in Truth-in-Lending, Truth-in-Savings, Regulation CC, Equal Credit Opportunity Act, Bank Secrecy Act, as well as a variety of other consumer-related regulations.  Cases of perceived mishandling of regulatory issues (negligence and possible gross negligence) by management or staff can result in both civil and criminal charges against those persons involved.   Sometimes the resulting ruling doesn’t individually enrich the litigants but is designed to send a meaningful message with regard to the circumstances. 

Monetary Risk

Probably the most recognized (and feared) means of dealing with non-compliance is the assessment of monetary penalties. Whether class-action or punitive regulatory sanctions, these penalties are both costly and ill-received by members, directors and the general public.   In recent years, with prosecutions prompted by BSA, OFAC, the Telephone Consumer Protection Act (TCPA), as well as the Consumer Financial Protection Bureau (CFPB), monetary penalties have gone from millions to billions.

The Sum of These Risks

Whether it’s financial, reputational or more punitive, there is a definite cost to failing to comply with laws, rules and regulations.  It may be measured in dollars, time (retraining or documentation), or public relations damage control.  Regardless of the penalty, it’s clearly far easier and more efficient to comply than not. If you question whether or not you need help or guidance, call us at Shared Compliance Resources. 

Categories: Compliance
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