Basel Committee issues guidance on the compliance function in banks

Today Compliance and the compliance function in banks. This paper provides basic guidance for banks and sets out banking supervisors' views on compliance in banking organisations.

Using a framework of principles, this paper illustrates how compliance with the laws, rules and standards that govern banking activities helps to maintain a bank's reputation with its shareholders, customers, employees and the markets. At the same time, the paper incorporates sound practice guidance to assist banks in designing, implementing and operating an effective compliance function. To optimise its usefulness to all banks, the paper stresses that a single framework of principles for effective compliance risk management does not restrict individual banks to a single organisational or operational approach. However, each bank must be prepared to demonstrate that the approach adopted is effective in dealing with the bank's unique compliance risk challenges.

Mr Jaime Caruana, Chairman of the Basel Committee and Governor of the Bank of Spain, noted: "Compliance has emerged as a distinct branch of risk management within the banking system, and banking supervisors have recognised the need to communicate fundamental supervisory expectations in this important and sensitive area. The Committee believes that this paper will provide banks with essential tools to meet these expectations".

Professor Arnold Schilder, member of the Basel Committee, Chairman of the Committee's Accounting Task Force and Executive Director at the Netherlands Bank, also noted the importance of taking a principles-based approach to this effort. "When the Basel Committee issued a first draft of this paper in October 2003, it made a conscious choice to issue a principles-based rather than a prescriptive document. Thanks to the many constructive comments received, we have further refined and clarified this approach, in particular the operational implications for smaller banks that cannot - and do not need to - put in place the same structure and processes necessary in larger or more complex institutions. The Committee expects continuing evolution in compliance risk management and will be monitoring future trends and developments with great interest."

Notes for editors

Basel Committee on Banking Supervision

The Basel Committee on Banking Supervision was established by the central bank Governors of the G10 countries in 1975. It consists of senior representatives from banking supervisory authorities and the central banks of Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States. Currently, the Committee reports to the central bank Governors and heads of supervision of the G10 countries. The Chairman of the Committee is Jaime Caruana, Governor of the Bank of Spain. Nicholas Le Pan, Superintendent of Financial Institutions, Canada, serves as Vice-Chairman. The Committee usually meets at the Bank for International Settlements (BIS) in Basel, where its permanent Secretariat is located.

The Accounting Task Force

The Accounting Task Force comprises experts from Basel Committee member institutions and outside observers. It has the lead responsibility in the Committee's consideration of accounting and auditing issues.