Why communication and documentation are key for banks.
It goes without saying that a regulatory exam can be stressful for financial institutions even under otherwise “normal” operating conditions. However, add in the unfamiliar reality of remote work during the coronavirus pandemic—a new experience for many financial institutions and regulatory agencies—and the prospect of completing a (now virtual) regulatory exam may seem even more daunting, for both regulators and institutions alike. This is especially true for small and midsize community banks, which may have never tested large-scale remote work until recently.
Bank audit and compliance teams should take heart and focus on the areas that make or break an exam. Three key areas are instrumental to the success of a virtual examination:
- Open and frequent communication
- Advance preparation and documentation
- Development of a remediation framework
The importance of communication to the successful completion of a virtual exam cannot be overstated. In the COVID-19 environment, the lack of face-to-face meetings and in-person engagement means that clear and consistent dialogue at every level is critical. All levels—including the board, executive management, line-of-business leaders, the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) team, and the examination team—must have an open and frequent communication channel.
During a traditional exam, a BSA officer can meet in person daily with examiners to conduct walkthroughs of processes and explain documentation to ensure that the examiners clearly understand the information the institution is sharing and that they don’t misconstrue written content. That’s much harder to do in a virtual environment. It becomes imperative for institutions to set communication expectations early and to establish frequent, perhaps even daily, check-ins to ensure they understand the examiner’s requests and to help guide them through the content the bank provides.
As a part of the examination process, examiners often need to interview key leaders, including line-of-business representatives at institutions. In these situations, it is advisable for the BSA officer or a designee to participate in the call. Involving the compliance function in interactions between the examiner and other bank interviewees can avert misunderstandings or miscommunications. Furthermore, the BSA officer or a designee can provide prompt, appropriate follow-up to requests that arise during the conversation.
Preparation and Documentation
Advance preparation, along with thorough documentation processes and procedures, are critical for an institution undergoing an exam. From the time a bank receives a request letter, the institution should establish and maintain a tracking log to ensure it captures—and fulfills—all of the examiner’s requests. It also should track the source of each document or information and ensure it has a consistent tracking system from exam to exam. This way, in the event that an examiner raises questions or issues, the bank can readily recall the source documentation and isolate the issue at hand.
Other important best practices to implement to ensure accurate, complete documentation include:
- Continuously logging requests, including those received during the course of the exam
- Retaining copies of all documents shared
- Memorializing all meetings or calls, noting any key takeaways
One area that can be easy to overlook is document organization. An institution should clearly and consistently label the documents it provides in conjunction with the initial request list or examiner requests during the exam. Doing so will help ensure the institution can quickly and accurately identify information provided related to the request. Labeling can be as simple as including the specific request number in its document naming convention. This level of organization helps set in place a process whereby from exam to exam an institution has a consistent approach and is more readily able to update data and information submitted in prior exams. It can therefore leverage the same source information provided in previous exams, rather than forcing staff to go on a scavenger hunt to locate the appropriate response. In turn, this ultimately serves to speed up the response process.
Inevitably, the examination process surfaces findings, recommendations, and observations that may or may not be formalized in the final exam report. It is imperative that banks gather, document, and review these moments of feedback for appropriate remediation.
Remediation efforts depend heavily on an institution’s ability to refer back to documents or processes reviewed during the exam. Once an exam is completed, the BSA officer should have a clear understanding of each finding or observation and the associated remedial action that needs to be taken to address the issue. As noted above, banks must be able to identify and track any changes made in their financial crime program in response to examiner feedback.
Other steps to effective remediation include:
- Document the remediation.
- Update internal controls.
- Conduct training to ensure that process changes are clearly communicated and adopted.
- Follow up to ensure updated controls are effective.
Finally, the institution should communicate the findings of the exam appropriately across the organization, and engage internal stakeholders throughout the remediation cycle to not only create collaborative engagement, but also to receive the buy-in necessary to effect change.
Organizations of all sizes are adapting to a new normal and embracing new processes and technologies, and financial institutions are charting new paths in the realm of examinations. Though virtual regulatory examinations during COVID-19 can be challenging, taking the right steps and being prepared can help ensure the process runs smoothly and efficiently.