Top Compliance Challenges in the Legal & Financial Services World

Top Compliance Challenges in the Legal & Financial Services World

Compliance has become a huge challenge for many in the legal and financial services world.

With many governments and civil society actors pushing for greater financial transparency, there has been a rapid increase in the quantity of reporting required by financial service providers and lawyers in the field.

FATCA, CRS, DAC6 and many other new regulations espoused by the US, EU and OECD, among others, have placed additional time constraints and budgetary burdens on practitioners in our industry.

Taking into account these changes and a rapidly evolving sector, we reached out to our members to share with us some of the main compliance challenges they face on a day-to-day basis and what impact these have had on their business.

Reconciling Compliance & Risk Management

Constantinos Pavlou Constantinos Pavlou, who is a Partner at Constantinos P. Pavlou LLC in Cyprus, believes a major issue he has to deal with in his practice as a legal advisor is in “determining where risk lies in relation to the constant changes in the law.”

“In many instances, clients are not aware of important issues to be addressed, such as Know Your Client (KYC) requirements, basic taxation and the annual obligations of their newly established company,” he says.

Belinda WongBelinda Wong, who’s based out of Hong Kong and runs Leader Corporate Services Limited, concurs, suggesting that many times it is challenging to help clients understand the risks of non-compliance.

“With the rapid changes in the global tax and corporate governance environments, on the one hand, it is difficult to keep pace with the changes, and, on the other, convince clients that certain market practices may in be judged as inappropriate, resulting in heavy penalties or even imprisonment,” Wong explains.

This might lead to riskier undertakings and challenges the financial services advisors to convince clients to avoid certain practices.

“When it comes to advising potential clients on proper practices, sometimes we may be challenged by them on their knowledge of these market practices,” she says.

Ultimately, Wong believes “there may be a need not to take on these clients.”

Contract Reviewing, Transactions & Time Delays

Contract Reviewing, Transactions & Time Delays

Constantinos Pavlou also raises the challenge posed by compliance requirements on the speedy, efficient and thorough process of contract reviewing and the closing of business deals.

“Many businesses and businessmen fail to acknowledge the fact that an agreement contains numerous terms and legal obligations that may bring forth countless issues,” says Pavlou, suggesting that collecting all required information “can be a nightmare.”

“Just think of a simple sales and purchase agreement (SPA) of two companies (seller and buyer) and the company involved. Obviously, you need the relevant documentation for all three companies. But what if behind these companies, its directors and/or shareholders are other companies?”

“You can imagine the clients’ frustration when you request all the KYC documents of all parties involved, up to the physical person, and risk the agreement from going through,” concludes Pavlou.

Karl HorsburghKarl Horsburgh, who runs International Audit Services SARL in Luxembourg, similarly believes that these additional compliance requirements “are slowing down the wheels of commerce.”

“One of the major challenges is the time delay in being able to complete a transaction and providing the same or increasingly more AML information to the accountant, lawyer and banker involved in a transaction,” Horsburgh suggests.

Data Protection & Compliance

A new challenge that has emerged vis-à-vis compliance in the financial services world stems from the recent implementation of Europe’s General Data Protection Regulation (GDPR).

According to Constantinos Pavlou, this new directive has pushed compliance departments “to adapt to many new requirements, such as audit and assessment systems, training, manuals, consent, data breaches and so on.”

However, Pavlou says, “the biggest challenge of all is not implementation as such, but to thoroughly explain the necessity and legal obligations that many senior businesses do not (or do not want to) understand.”

A Lack of Understanding of Regulations & Compliance Requirements

A Lack of Understanding of Regulations & Compliance Requirements

Given the steady stream of new regulations and compliance requirements, it is difficult for many in the industry to stay on top of things.

Edward RogersEdward Rogers from US Trust Advisory Services LLC in the Isle of Man believes a challenge is posed by “encountering poorly trained compliance officers who simply don't understand the structures but would rather push the ‘Reject’ button than own up to their lack of knowledge and experience.”

“The compliance officers of old were business enablers but the new generation seem more like business killers,” Rogers suggests.

Furthermore, Belinda Wong says that, while “we have presumed that there are enough compliance talents who have a full understanding of all the latest changes in the rules and regulations governing the operation of a company,” this is not the case.

“In reality, since the changes are so rapid, those in the compliance industry may not have a full grasp of the implications of these changes,” Wong says.

“Furthermore, the emphasis on compliance has not been in place long enough to ensure that there are sufficient trained talents and there is always a shortage of staff handling compliance,” she concludes.

This lack of understanding or clarity might lead to different interpretations of the regulations and overcompensation by the parties involved in an effort to avoid penalties.

Karl Horsburgh says that it may “not to be sufficient to apply the law as written, but instead each compliance officer wants to ensure that they are more than adequately covered in the event of a review by the supervisory authority.”

Hence, people or organizations involved in transactions are required to report additional information that might not be necessarily needed just to cover their tails.

Horsburgh mentions, in some instances, the burdensome need for “two proofs of residential address” and an “extra from the criminal register” to sign a contract.

In a recent example of such overcompensation, he says, “a bank in Luxembourg requested a client to provide a letter of confirmation by the Luxembourg tax authorities that they are in agreement with his Luxembourg company being owned by a Cyprus holding company.”

“Where will it stop?” Horsburgh wonders.

Are there any other challenges you have faced as a financial service provider? If so, make sure to submit them as a comment!

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