Governance Structure and Oversight of Trade Transactions

Governance Structure

A sound governance structure is the foundation of an effective AML/CTF program. It will include the board of directors and senior management setting the tone at the top, hiring a qualified chief AML/CTF officer, and properly resourcing the three lines of defense. In an organization such as a bank or a financial institution, the Board of Directors is primarily responsible for setting a strong compliance culture and implementing the compliance program. 

The “tone at the top” is a public commitment at the bank’s highest levels to comply with AML/CTF requirements as part of its core mission and recognition that this is critical to the overall risk management framework of the bank. To ensure appropriate oversight of the compliance culture, the board of directors forms a board-level sub-committee to periodically monitor the compliance practices and measures taken by the management.

The board of directors may delegate the responsibility to the Board Compliance Committee or BCC. The members of BCC periodically conduct compliance meetings, where significant compliance issues, breaches, and new regulatory requirements are reviewed and discussed.

Governance Structure

The board ensures that a strong compliance culture and control environment is maintained. The board provides oversight and guidance to the compliance committee and senior management to implement the compliance program and policies approved by the board. The management forms the set of processes, reporting lines, systems, and structures that provide the basis for carrying out regulatory requirements across the organization. The control environment relates to the commitment of management and employees to integrity and ethical values.

Governance Structure and Oversight of Trade Transactions

For internal controls to be effective, an appropriate control environment should demonstrate the following behaviors:

  • The board reviews policies and procedures periodically and ensures their compliance
  • The board determines whether there is an audit and control system in place to periodically test and monitor compliance with internal control policies or procedures and to report to the board instances of non-compliance
  • The board ensures the independence of internal and external auditors such that the internal audit directly reports to the audit committee of the board, which is responsible to the board, and that the external auditor interacts with the said committee and presents a management letter to the board directly
  • The board ensures that appropriate remedial action has been taken when the instance of non-compliance is reported and that system has been improved to avoid recurring errors or mistakes
  • Management information systems provide adequate information to the board so that the board can have access to records if the need arises 
  • The board and management ensure communication of compliance policies down the line within the organization

The board forms a sub-committee, known as the BCC, to provide strong oversight to the compliance committee and the management, to ensure effective and continued implementation of applicable regulatory requirements. 

The BCC ensures the management implements the board-approved compliance program for effective compliance. The BCC forms a management-level compliance committee known as the Central Compliance Committee or CCC. The CCC works on behalf of the BCC to regularly review and provide appropriate feedback to the management and employees regarding the organization’s overall compliance profile.

The Management Compliance Committee or MCC comprises all the departmental heads as members of the MCC, and they meet periodically to discuss the compliance status of their respective departments. The Chief Compliance Officer, or CCO, serves as the BCC’s secretary. The CCO also prepares and presents the agenda of the BCC meeting before the BCC members before each periodic meeting.

Governance Structure

The Money Laundering Reporting Officer

The Money Laundering Reporting Officer, or MLRO, being part of the compliance function, serves as the second line of defense and works in coordination with the first line of defense. It includes the Business and Operation Managers who are responsible for establishing the business relationships and processing the transactions of the clients and customers. MLRO is mainly responsible for adopting the risk-based approach toward managing the AML and regulatory compliance-related roles and responsibilities. 

As a best practice, the MLRO of a larger organization or business should not be directly involved in the business operations, receipt, transfer, or payment of funds. The appointed MLRO should also have independent oversight and be able to communicate directly with those parties who make decisions about the business, such as senior management or the board of directors.

An MLRO needs to:

  • Have the necessary authority and access to resources to implement an effective compliance program and make any desired changes
  • Know your business’s functions and structure
  • Have knowledge of your business sector’s ML/TF risks and vulnerabilities as well as ML/TF trends and typologies
  • Understand your business sector’s requirements under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act or PCMLTFA and associated regulations
  • The MLRO is mainly responsible to
  • Ensure compliance with applicable AML/CTF and KYC laws, rules, regulations, and instructions
  • Develop end-to-end compliance programs and all AML/KYC policies, procedures, methods, tools, etc., in the light of these guidelines and ensure/monitor/oversee their entity-wide implementation
  • Determine the resources required to perform compliance roles and responsibilities professionally and of desired quality
  • Ensure appropriate AML/KYC policies and processes are developed and implemented to ensure that all the customers are identified, screened, and verified before opening an account or establishing a business relationship with them
  • Provide summary data and report findings on compliance issues to the board or its subcommittee and Customer Compliance Management or CCM periodically
  • Report to the MCC and the BCC promptly on any material regulatory non-compliance, such as failures that may attract a significant penalty
  • Ensure that customer accounts are regularly monitored to identify suspicious activities and transactions
  • Review the compliance policies and procedures to ensure that AML, CTF, and KYC-related regulatory requirements are incorporated for meticulous compliance
  • Coordinate with senior management to implement the overall compliance program
  • Respond to and facilitate regulatory authorities or agencies in performing inspections or investigations
  • Apprise the board of directors and senior management on AML/KYC initiatives
  • Ensure that the employees are provided with AML/KYC training
  • Timely and accurately report the Suspicious Activity Report or SAR to the relevant regulatory authority
Governance Structure

Final Thoughts

Governance structure and oversight of trade transactions refer to the policies, procedures, and systems that are put in place to manage trade activities in an organization. The objective of this governance structure is to ensure that trade transactions are executed in a transparent, efficient, and compliant manner. The governance structure typically involves various roles and responsibilities, such as trade execution, trade confirmation, settlement, and risk management. The structure also includes oversight functions, such as compliance, audit, and risk management.

The governance structure and oversight of trade transactions are critical in mitigating risks associated with trade activities, such as fraud, errors, and regulatory non-compliance. Therefore, organizations must have robust governance structures and oversight mechanisms to manage trade activities effectively. In summary, governance structure and oversight of trade transactions are essential elements of an organization’s risk management framework. They help ensure that trade activities are executed in a compliant and transparent manner, while also mitigating the risks associated with such activities.